Peoria Journal Star

July 2, 2004

Bielfeldts modify foundation
Attorney general's inquiry prompts changes in board makeup, fees and salaries; donations down last year

of Copley News Service

WASHINGTON, D.C. - Facing scrutiny from the Illinois Attorney General's Office, Peoria-area philanthropist Gary Bielfeldt said Thursday he and his son will forgo investment management fees and commissions they've been collecting from the family's tax-exempt foundation.

Bielfeldt also said his wife, Carlotta, no longer is drawing her $110,000-a-year salary as president of the Bielfeldt Foundation and that plans are under way to restructure its board so Bielfeldt family members are no longer the majority.

In a telephone interview, Bielfeldt said he is making the changes in an attempt to avoid legal action by the attorney general.

"If that's what they want, that's what we'll do," said Bielfeldt, who denied any wrongdoing and maintained he had followed his lawyers' legal advice in all foundation affairs.

"Sure, it's disappointing. But if that's what people want, so be it. If our name lives on such that we have done something to contribute to the betterment of Peoria and that's the best thing, that's fine."

Bielfeldt agreed to the interview after the Attorney General's Office confirmed it is investigating the foundation.

"We are looking into financial issues associated with the Bielfeldt Foundation," agency spokeswoman Melissa Merz said Wednesday.

Since the foundation's creation 19 years ago, it has given $26.2 million to central Illinois charities, universities and churches. During that same time, the Bielfeldt family has been paid $21.6 million by the foundation to conduct its business, according to foundation tax returns.

"I felt that the salaries and fees that we were receiving were certainly within the guidelines and rules as we understood them to be," Bielfeldt said.

Senators take note

The foundation's transactions also were presented to Capitol Hill lawmakers pushing to tighten regulation of tax-exempt foundations.

U.S. Senate Finance Committee Chairman Charles Grassley, R-Iowa, has cited the Bielfeldt Foundation, among others, as he drafts legislation that would place greater restrictions on foundations' "self-dealing," or paying family members for services and investments.

"Sweetheart deals with insiders have to stop," Grassley said in a statement issued by his office. "Foundation executives and board members are supposed to govern, not profit."

As the Bielfeldt family collected millions in investment fees, the foundation assets tumbled from a peak of $50.5 million in 1995 to $12.8 million in 2002, a 75 percent drop. They increased slightly to $13.3 million in 2003, according to the tax return filed last week.

"The foundation was going to be my legacy," Gary Bielfeldt said. "I made it by trading. I'm proud of it. I feel badly that I lost during that period."

But the steep drop caught the eye of attorney general investigators, who contacted the Bielfeldts in October 2002.

"They were concerned about why the assets had dropped. I explained it was due to commodity futures trading, which I was extremely disappointed about and not happy about. But it happened," said Bielfeldt, who made his fortune trading in the mid-1980s.

"I never would have done that if I didn't think I could do it as well or better than other people," he said. "Hindsight is 20/20 in the investment world."

Changes in the works

Bielfeldt said he stopped all futures trading with foundation assets since the initial contact by investigators. He didn't hear from them again until January of this year, he said.

"We've cooperated throughout," said Bielfeldt's attorney, David Murray, who noted the changes under way at the foundation were suggested by the attorney general's staff.

He also said the attorney general's office didn't seem particularly interested in the payments to family members when the foundation was making money.

"They do not like to see interested family members making commissions and managing the accounts, particularly when the foundation isn't making big bucks," Murray said.

The foundation's board of directors will be restructured by Aug. 31, Bielfeldt said. The board currently consists of Bielfeldt, his wife Carlotta, his son, David, and his daughters, Linda Greene and Karen Bielfeldt-Wales.

Ultimately, outside investment managers will be hired, he said.

Shrinking payouts

Charitable grants from the foundation shrank dramatically in 2003. While Peoria-area charities received $686,315 from foundation, the family received $625,736, primarily for investment services, according to the foundation's recent tax return. A year earlier, the foundation had given charities $1.2 million, and Bielfeldt family members had received $3.1 million.

During the same two-year period, the number of charities getting grants dropped from 69 to 33.

The largest payment to a Bielfeldt in 2003 was $387,486 to David for commissions, according to the tax return. Of that amount, he actually received $293,000, with the remainder going to First Allied Securities, for which he works as a broker, Gary Bielfeldt said.

In addition to his wife's salary of $110,004, Gary Bielfeldt was paid $128,246 from the foundation last year for investment management services.

Most of last year's grant money, $500,000, went to the planned expansion of Glen Oak Zoo, for which the family pledged a total of $5 million two years ago. David Bielfeldt is on the board of the Peoria Zoological Society and Carlotta Bielfeldt co-chairs the capital campaign.

Zoo manager Jan Schweitzer called the Bielfeldts "good people. They made their money here and they put their money back into the community here to make it nicer."

Last year's second-highest grant, $36,000, went to First English Lutheran Church in Peoria, the family's longtime church, where David Bielfeldt is a trustee.

Sensitive to the drop-off in charitable giving in 2003, Bielfeldt noted that the foundation wrote $544,800 in checks in January 2004. That included $200,000 to Bradley University, which received just $25 in 2003.

Private funds turn public

Gary and Carlotta Bielfeldt created the foundation in the mid-1980s with $30 million. While the Bielfeldts and other families fund foundations with their own money, they get a significant tax deduction when they do so.

"This is quasi-public money and every taxpayer has a stake in it. It's not private money," said Rick Cohen, executive director of the National Committee for Responsive Philanthropy. "Private foundations have forgotten they've been entrusted by the public to administer for the public good and not for their own enrichment or self-indulgence."

Cohen cited the Bielfeldt Foundation in written testimony before the Senate Finance Committee last week to illustrate the need for stricter regulation and enforcement of foundations.

"The fact that it would take that much in administrative expenditures to put out that little money is something that should raise everybody's eyebrows," Cohen said in an interview.

In his testimony, he specifically noted the $3 million that the Bielfeldt Foundation paid to family members in 2002. He urged the panel to adopt "stronger definitions of and restrictions against foundation trustee self-dealing especially a standard that eliminates the practice of investing foundation assets through foundation trustees' firms or funds. These types of services should be outsourced on a competitive basis to companies that are qualified to invest what are largely public dollars."

Laws may tighten

Chairman Grassley said several proposals being considered by his committee would address issues raised by the Bielfeldt Foundation's transactions.

One proposal would tighten the standards for self-dealing and for so-called jeopardy investments and increase the penalties for violating those standards. Current law doesn't prohibit such payments for services rendered by family members, though it does require the salary or fee to be reasonable, a standard that is vague and difficult to enforce, foundation specialists said.

Bielfeldt said the fees and commissions paid to himself and his son were the standard rate.

While current tax law prohibits foundations from making risky investments that would jeopardize their charitable programs, Grassley has proposed to require a stricter "prudent investor rule" as several states already have adopted.

Illinois law doesn't have a prudent investor statute per se, but it does require foundation directors not to waste assets, according to the attorney general's office.

"We can't have board insiders playing fast and loose with charitable dollars," Grassley said, adding the Bielfeldt case "appears to highlight the inadequacy of the current rule."