CAN’T EVEN PREDICT THE FUTURE FIVE YEARS OUT: SALVATION ARMY SHOULD HAVE GONE TO COURT

DATELINE: June 15, 2009, Chicago

Over the years, we have examined a number of restricted gifts.  While we always acknowledge the right of donors to make the gifts, we also have always questioned whether such gifts are wise.  Donors are lousy at predicting the future, as we have seen time and again.  Stephanie Strom offers up Exhibit A in Plan for Dozens of Salvation Army Centers Falters (June 14, 2009).

Joan Kroc, the widow of Ray, the founder of McDonald’s, left $1.8 billion to the Salvation Army at her death in 2003.  The Salvation was instructed to go on a spending and building spree.  Kroc required the Salvation Army to build...

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30 community centers around the country.  These weren’t going to be the typical community center.  Strom describes them as lavish and our reading of prior newspaper stories confirms that view.

From the outset, the gift and the accompanying instructions were a problem for the Salvation Army, which takes a frugal approach to charitable expenditures.  Although Kroc was pushing the Salvation Army in new directions, she tried to anticipate the potential problems.  The gift also included an endowment for each community center equal to the its cost of construction.  That translates into $30 million in construction costs per center and a $30 million endowment.

Early on, the Salvation Army questioned whether even the $30 million endowment would be sufficient.  As a consequence, it required, on average, each community to raise, on average, an additional $21 million as a condition to receiving its community center.  We certainly can’t argue with the Salvation Army’s prudence and financial stewardship, but look at what has already happened as a consequence of Kroc’s decision to design the world from the grave.  Her plans now are diverting community funds from other causes.  

Apparently Kroc’s grand design has not been easy to implement.  After five years, the Salvation Army has only opened two of the 30 community centers.   Two others are scheduled to open in 2010.  The planned centers in Detroit and Massena, N.Y have been scuttled, according to Strom.  Some community’s (Omaha, for example) have not had problems raising the additional funds.  Chicago, on the other hand, is having trouble raising the $50 million in additional funds that the Salvation Army believes is necessary to further endow Chicago’s center.

There is another problem.  Kroc’s endowment has taken a hit, as many others have.  Once again, the Salvation Army looks pretty good in how it conducts its activities.  According to Strom, the Kroc endowment is down 14%, from $900 million to $774 million.  We’d like to know the name of the investment manager.  That’s a pretty good performance record given what has transpired over the last year. Yet, the hit is apparently having an impact on the Salvation Army's plans.

Strom reports that there has been some controversy surrounding the fundraising efforts.  The efforts in Detroit have generated the most heat, with a protest planned.  One executive who led the fundraising campaign pointed to internal politics in the Detroit division of the Salvation Army.  He warns other big donors to be more cautious when making gifts, taking potential internal politics into account.

That executive has offered wise advise.  Kroc clearly was well intentioned and generous, but she had an agenda that she tried to impose on the Salvation Army.  In our view, she should have given the Salvation Army the $1.8 billion without all the restrictions.  She apparently was impressed enough with the Salvation Army’s work to believe that they were good stewards and knew how to handle money.  She should have shown more confidence in their judgment.

Kroc's gift offers a lesson for other wealthy donors who want to change the world.  It is one thing to direct that your money be used to promote a certain activity and to provide some guidance, it is quite another to design a complex and detailed program.  Kroc could have easily said that she wanted her funds to be used to develop programs around the country that would benefit local communities, with each program being well financed and endowed.  It is quite another to specify detailed blueprints.  

We are only five years into the plan and the cracks already have developed.  What’s going to happen in 20 years when cracks in the swimming pools develop or the community no longer wants or needs the type of facility that was built in 2010?

As we said, Kroc had the right to dictate how her funds were spent, but not every right need be exercised.

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