Today’s Milwaukee Journal-Sentinel carries an article explaining how the Milwaukee Public Museum’s endowment was “accidentally” stripped. It reports incompetence on the part of all involved. But the excuses that are given don’t justify or adequately explain what happened.
The article’s principal revelation is that when the Museum’s endowment committee met in January 2005, it was told that the Museum had $6.4 million at the end 2004, when in fact it had....
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$2.5 million. That may be true, but it does not absolve the committee of responsibility for lax oversight. Here are a few questions that should be asked:
Why was nobody paying attention when the endowment slipped from $4.6 at the end of August 2004 to $2.5 million?
Why were restricted assets held in operating accounts? The Journal-Sentinel confirmed what we said ten days ago: The mixing of operating funds with restricted funds is highly unusual.
Why was the investment committee so passive? One member of the committee lamented, “We were never given an accurate number for December.” Do you just take what you are given without questioning it? Given the relatively flat stock market performance over the last year, didn't anybody wonder how the endowment jumped from $4.6 million to $6.4 million in less than six months? That's about an 80% annualized return. And if the money was invested in more conservative bonds, we'd like to know the bonds because we are tired of our 3.0% return on fixed-income securities. The Journal-Sentinel talks about a drop in the endowment "that severe" as cause for alarm bells to go off. A jump in the reported endowment by that amount should have rung the exact same bells.
Why couldn’t Museum officials tell the Journal-Sentinel whether two signatures were required to withdraw money from the endowment account? This is hardly a “state” secret. Either two signatures were required or they weren’t. If one were looking for this information, one would typically look at minutes for board meetings, which would contain a banking resolution. Does this mean that the board’s minutes are incomplete or in disarray?
Why was information regarding the endowment's balance first shared with the CFO by the investment advisor “about 10 minutes before the [January] meeting?” Clearly there is an issue regarding the investment advisor’s reporting capacity if its system was generating the sort of mistake reported by the Journal-Sentinel, but why wasn’t the endowment committee receiving a packet of information several days before the meeting so that each member could review the information and formulate questions?
Did the Museum’s board/investment committee review the accountant’s annual management letter pertaining to internal controls and the integrity of the accounting system? The board, as part of its oversight capacity, is responsible for assuring that the accounting system is generating accurate financial statements. That doesn’t mean that individual board members design the chart of accounts, but it does mean that there should be an audit committee that stays on top of the financial people to make sure the information is forthcoming and accurate. That committee is charged with seeing that the recommendations from the organization’s outside auditors are implemented. One has to wonder what the outside auditors were telling the board.
The Journal-Sentinel article does contain one apparent inaccuracy. In discussing the invasion of the endowment, the Journal-Sentinel implies that not as many restricted assets were taken as the number suggested. Specifically, the Journal-Sentinel reports:
A basic reason for separating endowment and operating money is to ensure the wishes of donors are respected, Croft said.
That appears not to have been the case in Milwaukee. In April, the endowment was $600,000 below the more than $1.1 million in "permanently restricted" assets it contained at the end of August. The rest of the money in the endowment at that time was unrestricted or restricted only temporarily by its donors.
This can be read to imply that people should only be concerned about permanently restricted assets. The Financial Accounting Standards Board defines temporarily restricted assets as follows:
A donor-imposed restriction that permits the donee organization to use up or expend the donated assets as specified and is satisfied either by the passage of time or by actions of the organization.
FASB No. 117.
Legally, a temporarily-restricted asset is as much a restricted asset as a permanently restricted asset. The fact that the restriction was temporary does not in any way excuse ignoring the restriction. We suspect that at least some of the Soref funds referred to later in the Journal-Sentinel article were classified as temporarily restricted. Consequently, measuring the shortfall by looking only at permanently restricted assets ($600,000 below the more than $1.1 million in "permanently restricted") seems to imply that everything else was fair game. It wasn't.
COUNTY BOARD TO APPOINT OVERSIGHT BOARD. County Executive Scott Walker and County Board Chairman Lee Holloway have proposed a five-person oversight board that would monitor Museum spending for the foreseeable future. That is fine, but we would be careful about who controls the appointments to that board. Specifically, the Journal-Sentinel is reporting that board members would be named by County and Museum lenders. We would strongly advise against providing the Museum’s lenders with any input into the composition or functioning of this board. As we understand the facts, the Museum’s lenders already have representatives on the Museum’ board. Specifically, the Journal-Sentinel recently reported:
That gets tricky because representatives of the museum's major lenders hold key spots on the board.
D. Umhoefer and A. Lank, Saving the Museum is a Big Gamble for All Involved: Public's Stakes are Highest as Future is Debated (June 4, 2005).
In our view, the potential conflicts of interest that existed when these lenders functioned as both board members and lenders need to be fully investigated--note, at this time, we know of no inappropriate actions on the part of the Museum's lenders. The existing lenders should be stripped of oversight responsibilities, with more objective and independent people put in charge. While the proposed oversight board is apparently not investigatory in nature, it will undoubtedly learn much along the way given its activities. Any insights it may gain should be part of the public disclosure and discourse. Moreover, the auditor appointed to this board should have no prior relationship with the Museum or any of its directors.
LAX REGULATION. The real problem may lie with Wisconsin’s amazingly lax regulatory environment—something that probably has Fighting Bob LaFollette spinning in his grave as the Museum story unfolds. Quite frankly, ascertaining the Wisconsin Attorney General’s enforcement powers by reading the Wisconsin statutes is quite difficult—the administrative powers vested in the Wisconsin Attorney General are scattered throughout the statute books, making them difficult to ascertain. So we took a different approach. We called the Wisconsin Attorney General’s office. We also called the Wisconsin Department of Regulation and Licensing, as well as the Department of Agriculture, Trade and Consumer Affairs. It was clear after those calls that nobody in the State of Wisconsin is seriously regulating charities.
Just last week we received an unrelated phone call from someone in the office of a major Mid-western state’s attorney general’s office who is charged with enforcement of the state’s charitable laws. New York, Illinois, Massachusetts, Minnesota and California are among the many states that actively regulate charitable organizations. Last Fall, we attended the public portion of the annual meeting of NAAG/NASCO, the national association of public officials charged with regulating charities at the state level. There are many other states that actively regulate charities in an effort to prevent exactly what has happened at the Milwaukee Public Museum. Wisconsin is clearly out of step with its peers, as well as its longstanding progressive tradition.
While Wisconsin does require certain notices to be filed with the Wisconsin attorney general, those notices don’t seem to receive a thorough or substantive review. The person we spoke with suggested that they are given to a file clerk and simply deposited in the deep recesses of the Wisconsin Department of Justice. We are still waiting for a response to the message we left with the apparent file clerk. The Department of Regulation and Licensing also appears be nothing more than a collection agency for the mandatory informational filings by charities soliciting in the State of Wisconsin. When we clicked the web link to review the names of those assigned to the oversight board for charities in the Department of Regulation and Licensing, the webpage indicated that the information was not available on line. Why couldn’t a public agency disclose the names of people acting in a public capacity? Moreover, the last regulatory digest posted on the board's website is for 2002. When we clicked on the minutes for the board's meetings, we found nothing. Nor did we find any agendas. There was, however, a nice stock photo (we assume) of a man and woman looking a laptop at a conference table. The spokesperson for the Department of Licensing and Regulation didn’t have a clue—charitably speaking --when we asked about whether his department handles complaints regarding mismanagement.
We didn’t waste any more time on this effort. There could be people deep in the bowels of these agencies that do handle charitable regulation, but the response by the people on the frontlines make it very clear that the regulation of charities is not at the top of Wisconsin’s “To Do” list. To the extent the people of Wisconsin are troubled by recent events at the Museum and other charitable organizations that have been in the news in recent years, they only have themselves to blame.
Again, we are short of information and just don’t have the time to fully investigate, but it appears in 1997 Wisconsin’s laws regulating charities were changed significantly (effective 1999). The results of those changes appear to be bearing fruit, albeit maggot-infested fruit. While we don't know for sure who was behind these changes, the Journal-Sentinel might want to use its resources to explore the changes and those who pushed them through. Since we don't know for sure, we won't publicly identify names, but we are willing to bet one particular group of special interests was behind these changes.
Today’s Journal-Sentinel’s article contradicts our findings, in part. Specifically, the Journal-Sentinel reports that a spokesperson for the Wisconsin Attorney General claimed jurisdiction over charities. He indicated that nobody had contacted the Attorney General’s office about the Museum. That’s why we say “in part.” It is hard to imagine a principal regulator in any other setting sitting on its hands for over five weeks while the major newspaper in the jurisdiction reports almost daily on a major debacle within the regulator’s jurisdiction. Does the Wisconsin Attorney General only spring into action when it receives a phone call? This confirms our initial findings of lax regulatory oversight over Wisconsin’s charities.
POINT OF CLARIFICATION: The Journal-Sentinel report touches briefly on the rights of donors regarding restricted assets. Typically, the donor has no rights or standing to enforce the terms of a restricted gift unless he or she expressly reserves the right. Nor does a donor have a right to a return of his or her gift if restrictions are violated unless the donor has retained a right of reverter. That would at least raise a tax issue, so many donors provide what is termed a "gift-over" to another Section 501(c)(3) organization if the restrictions are violated or cannot be complied with. As a general rule, it is the attorney general or another governmental agent that has primary (if not exclusive) standing to enforce the terms of charitable restrictions. Of course, Wisconsin appears to be so out of step with the world that who knows what Wisconsin law is on this point.
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