September 2, 2003
Foundation loses millions under Bielfeldts
Peoria family charges $21 million to manage its own charitable foundation
By DORI MEINERT
of Copley News Service
LAST OF THREE PARTS
WASHINGTON, D.C. - Many Peorians have praised the Bielfeldt Foundation for its generous support of local projects and charities over the past 17 years. But few know the tax-exempt organization has paid millions to the founding family, even as the foundation's assets shrank dramatically in recent years.
While the Bielfeldt Foundation has given $25 million to charities over the years, it has paid the Bielfeldts $21 million, according to its tax returns.
Most of the payments were for managing the foundation's funds, which have fallen in value from a peak of $50.5 million in 1995 to $12.8 million last year.
In 2002, the foundation gave $1.2 million to charities while paying more than $3 million to its founder, Gary Bielfeldt, his trading firm and his son. Bielfeldt's wife, Carlotta, also earned $120,000 as the foundation's president.
"It's highly unusual'' for investment expenses to surpass grants, said Janne Gallagher, vice president and general counsel for the Council on Foundations here.
Congress tightened laws governing tax-exempt organizations in 1969 in response to highly publicized abuses by foundations. Even though the Bielfeldts and other philanthropists fund such foundations with their own money, the public has a stake in the money, specialists said.
"Once they've given to the foundation, it's dedicated irrevocably for charitable purposes,'' Gallagher said. "They got a substantial tax deduction when they made the original gifts, and there's a public interest in how that foundation is subsequently administered.''
The Bielfeldts, who were contacted through their attorney, Edward Sutkowski, declined to comment because of pending litigation that is largely unrelated to the foundation's activities. Sutkowski said the Bielfeldts relied on the advice of legal counsel in Chicago and Milwaukee in making decisions for the foundation.
None of the six foundation and tax-law specialists who reviewed the foundation's public documents for this story contended that the Bielfeldts had broken the law. However, some of the financial dealings reported on the Bielfeldt's tax return are likely to attract IRS interest, they said.
"Certainly, if the IRS were to conduct an audit, I guarantee you that they would be requesting additional information about compensation and financial relationships between the officers, the founders and the foundation and also on those fees and the nature of the investment portfolio,'' said Marcus Owens, a Washington lawyer. Owens should know. He once served as head of the IRS' division that oversees tax-exempt organizations.
The IRS doesn't comment on tax cases.
The average investment expense for family foundations
the size of the Bielfeldt Foundation is 0.6 percent of assets, according to a survey conducted by the Council on Foundations. A survey of members of the Association of Small Foundations found the average investment expense for foundations that size to be 0.46 percent of assets. (Allowing for the fact that some survey respondents might have omitted commissions, the average could range up to 2 percent of assets, according to the Association of Small Foundations.)
By contrast, the $3 million in management fees and commissions that the Bielfeldt Foundation paid the Bielfeldt family and its firm in 2002 was 23 percent of the foundation's assets.
The figure raised eyebrows among several foundation and tax-law specialists interviewed for this article.
"It certainly sounds like an excessive payment to me,'' said Jason Born, program director for the Washington-based National Center for Family Philanthropy.
The $3 million paid to the family last year includes $2.2 million to Bielfeldt and his investment firm for investment management fees and commissions and $744,618 to his son, David, for commissions. In addition, Bielfeldt's wife, Carlotta, got $120,000 plus benefits for serving as the foundation's president.
Bielfeldt controls 95 percent of the investment firm, Bielfeldt & Co.
The Bielfeldt Foundation's assets dropped by 64 percent, or $23.7 million, in the past two years. Its assets fell from $36.5 million in 2000 to $12.8 million in 2002. The losses were due primarily to futures trading, which is how Bielfeldt made his earlier fortune.
Trading in futures is notoriously volatile and risky. But it's not necessarily off limits to charitable groups and others that tend to be more conservative with their funds.
Many large foundations and even pension funds turned in a limited way to futures and other alternative investments in the early 1990s in an effort to minimize losses on stocks and bonds.
At least initially, the Bielfeldt Foundation appears to have had IRS permission to invest up to 10 percent of its assets in commodities trading and to compensate Bielfeldt with fees that are standard for the industry. An IRS advisory letter attached to the foundation's 1992 tax return indicates as much.
It’s unclear whether the Bielfeldt Foundation violated that 10 percent cap or sought a new IRS ruling. The transactions are not publicly disclosed and Bielfeldt declined to be interviewed.
Several specialists noted that Bielfeldt’s investment strategy was more aggressive than most.
The Council on Foundations and the National Center for Family Philanthropy recommend that foundations have a balanced investment portfolio to safeguard their assets.
The federal tax code prohibits private foundations from making risky investments that would jeopardize their charitable programs. IRS guidelines call for closer scrutiny of some futures trading.
"It’s up to the organization, if questioned by the IRS, to defend that particular investment,’’ said Owens.
While many foundations saw their assets shrink in 2001 because of plummeting stock values, the average decline in Illinois was 6 percent, said Jelene Britten, a spokeswoman for the Donors Forum of Chicago. That is far less than the 46 percent decline of the Bielfeldt Foundation’s assets that same year, the most recent for which statewide data is available.
The IRS doesn’t look at whether an investment loses money — even such a significant loss as the one incurred by the Bielfeldt Foundation. It focuses on whether the investment decision was proper in light of the foundation’s whole portfolio at the time it was made.
"The rules aren’t designed to be Monday-morning quarterbacking,’’ said John Edie, who spent 21 years as general counsel to the Council on Foundations before going into private consulting.
Likewise, federal tax laws don’t prohibit foundation founders or their family members from being paid for professional services provided to the foundation — as long as the fees are "reasonable and necessary.’’
Commissions for futures trading are generally higher than other types of investments. Several people involved in futures trading said they couldn’t tell based on the information in the foundation’s tax return whether the amounts paid to Bielfeldt and his son were higher than usual.
The questions about the foundation’s finances come as Gary and Carlotta Bielfeldt are trying to resolve a long-running battle with the IRS over their personal finances. The IRS has tax liens totaling $69.6 million on their property. The Bielfeldts also have sued their former accounting firm.
In addition, they are appealing a 1999 decision in which they were fined $200,000 for violating futures trading limits. But lawyers for the Commodity Futures Trading Commission are seeking a $4.6 million fine, equal to the profits Bielfeldt and his wife made in the trading.
The Bielfeldts created the foundation with two major contributions totaling $30 million in 1985 and 1986. Its assets continued to grow, peaking at $50.5 million in 1995. Bielfeldt, his son and Bielfeldt’s firm received $2.3 million in fees and commissions that year.
The biggest drop in assets came in 2001, when the foundation lost $17 million, or 46 percent, dropping its value down from $36.5 million to $19.5 million. Before that, the Bielfeldt Foundation ranked 76th in Illinois based on its assets, according to the Foundation Center in New York.
The two Illinois foundations closest in size to the Bielfeldt Foundation reported no investment managers paid more than $50,000, the threshold for reporting on the IRS form.
Initially, a full-time manager earning $45,000 a year ran the foundation. Beginning in 1989, Bielfeldt’s wife, Carlotta, began drawing an annual salary of $80,000 to run it as president. Since 1998, her annual salary has been $120,000. Overall, the foundation has paid her $1.6 million to run the foundation.
The foundation has given away more than $25 million since it was created in 1985 when Bielfeldt was at the height of his financial success. In doing so, it has touched nearly everyone who has ever visited a Peoria park, heard the symphony or needed the services of numerous area human care agencies.
While the inner workings of the Bielfeldt Foundation remain largely unknown, it and the founding family have won the gratitude of many local officials and residents.
"I think they truly care about the community they live in and want to give both by way of talents and money to make our community a better place. It’s a sincere motivation,’’ said Peoria Park District Board President Tim Cassidy.
Last fall, they pledged $5 million to the Glen Oak Zoo expansion project. They donated $5 million for the Peoria Park District’s riverfront RiverPlex recreation center. They covered most of the $7.2 million price tag for an athletic administration building at the University of Illinois campus at Urbana-Champaign. The building, which opened in 1996, bears their name.
In 2002, the foundation gave $1.2 million to almost 70 different central Illinois not-for-profit groups with causes ranging from animals to the arts, from churches to colleges.
"The Peoria area wouldn’t be what it is without the Bielfeldts, both their talents and their philanthropy,’’ Cassidy said.
In testimony in U.S. Tax Court in 1998, Bielfeldt expressed pride in what he was accomplishing through the foundation.
"I’m very proud of that and what has been able to happen and what we’ve been able to do for our university and for our community.’’
He revealed some of his motivation in an earlier interview.
"I judge my success by what I do with the money I accumulate,’’ Bielfeldt told the author of the 1989 book, "Market Wizards.’’