- Bernadine Healy, the departing American Red Cross (ARC)
president and chief executive officer (CEO), testified before Congress
the second week in November concerning the stunning decision by the nation's
most-recognizable charity to hold back nearly one-half of the $546 million
it has received to aid the victims of the Sept. 11 attacks on the World
Trade Center and the Pentagon. Healy explained to lawmakers that an estimated
$300 million would be required for the "immediate needs" of the
victims, but that the remaining $246 million would be put to such unrelated
uses as "investments in volunteer mobilization, chapter development
for response to weapons of mass destruction, expanded blood security and
continuity of operations efforts."
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- This meant that hundreds of millions of dollars given
for victims through the ARC would not go to them but instead be tucked
away for other ARC projects and infrastructure. Given the trickle of distribution
to date, Healy's testimony caused an immediate stir. For example, critics
noted, the ARC announced that $153.8 million of the $546 million donated
had been "committed or spent" on relief efforts. The following
figures were said by the ARC to account for how that money has been spent:
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- Immediate disaster relief: $72.4 million;
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- Family Gift Program: $47.9 million;
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- International family assistance: $0.6 million;
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- Immediate blood readiness and strategic blood reserve:
$12 million;
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- Armed forces services: $0.4 million;
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- Community outreach: $14.7 million; and
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- Direct support costs: $5.8 million.
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- Only two of those categories represent direct family
assistance: the Family Gift Program and International Family Assistance,
totaling $48.5 million, not $153.8 million. Indeed, while the ARC reports
that 25,000 families have received assistance, this $48.5 million breaks
down into $1,940 for each of the 25,000 families.
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- A combative Healy testified that the money wasn't raised
to "give $200,000 to every family," something all $546 million
collected by the ARC Liberty Fund would not come close to doing. According
to an ARC official, "Dr. Healy's reference to the $200,000 per family
was based on dividing all of the money collected by each of the charitable
organizations, totaling $1.3 billion, among the 25,000 families, not just
the amount collected by the American Red Cross."
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- If the ARC had taken its donations of $546 million and
divided it in cash among 25,000 families, which it did not do, each would
have received $21,840. However, with the ARC board's decision to hold back
nearly one-half of the money, $19,900 was being withheld from each of the
families of the victims of the Sept. 11 attacks and pocketed by the ARC,
according to Healy, for "threats we are facing" in the future.
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- According to a financial analyst who spoke to Insight
on the condition of anonymity, "What this means to the donors is that
the American people sent enough money for each of these families to live
for approximately six months and the ARC decided to distribute just two
weeks of financial assistance and keep the rest of the money for whatever.
The question to be asked is whether this was the intent of the donors."
It was not.
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- While no one found anything dubious about a charitable
organization wanting to set aside a nest egg to deal with future catastrophic
events, the ARC did not lay all its financial cards on the table. But two
congressional hearings failed to address the organization's claimed need
for reserves even though it already has more than $1 billion in reserve,
including its Endowment Fund.
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- According to the 1999-2000 financial statement of the
ARC, the tax-exempt charitable organization has maintained a national Endowment
Fund since 1905. By a 1910 Act of Congress the fund is under the control
of a separate board of trustees, which is responsible for overseeing and
investing these monies. While principal added to the fund during these
many years is never spent, being held in perpetuity, the income from the
investments of that principal may (or may not) be used for current purposes.
That is, tax-exempt contributions are moved to the ARC Endowment Fund,
and invested, and any income derived from the investment may (or may not)
be transferred to the General Fund and used for day-to-day purposes.
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- What is more, the organization's financial statements
do not provide detailed information. For instance, the 1999-2000 consolidated
financial statement of the ARC lists the investments of the organization,
including the Endowment Fund, in millions as:
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- U.S. government securities: $272,008;
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- Corporate bonds and notes: $214,005;
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- Common and preferred stocks: $602,394;
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- Mortgage- and asset-backed securities: $254,064;
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- Money market and other: $231,559.
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- Based on the breakdown, totaling more than $1.57 billion,
there is no way to know what companies are benefiting from the ARC investments
and therefore no way to know if there may be conflicts of interest among
the members of the various boards or whether they may be profiting from
those investments.
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- Additionally, because there is no detailed breakdown
of investments, there is no way to know exactly how much money is earned
or lost on the $1.57 billion in investments. Furthermore, based on the
limited information provided in the consolidated financial statement, there
is no way to tell how much money was distributed and for what purpose.
Nor is there any way to tell who manages the $1.57 billion investments,
how their compensation is determined and what it costs the ARC annually
to manage the Endowment Fund.
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- In theory, the investments are a kind of reservoir. When
funds are low in the General Fund, the floodgates are opened and a prudent
amount of money is released. But, based on the financial statements, there
is no way of knowing how much money is in the reservoir at any given time,
how much is added every year from what sources and how much is allowed
to trickle out in times of need.
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- Victims of the Sept. 11 attacks may find it even more
difficult to accept the organization's penurious behavior with much-needed
financial assistance when they learn of the salaries of the organization's
leaders. For instance, the direct compensation of president/CEO Healy is
$377,700 per year. The other board members collect compensation totaling
nearly $1.2 million. The compensation of the five highest-paid employees
(other than officers) comes to slightly more than $1.2 million, with a
grand total for the 15 top executives and employees coming to more than
$2.5 million per year.
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- Healy did not return Insight's calls about these numbers.
But John D. Campbell, the ARC's chief financial officer, confirms that
there is $1.5 billion in invested reserves, with one-third of it in the
Endowment Fund and $1 billion or so in loose change in unnamed investments
handled by the general board without oversight. He declined to give details,
but this did not appear to embarrass him.
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- Despite the serious questions surrounding the decision
of the ARC to hold back several hundred million dollars from the Liberty
Fund, little or no attention was given to the issue during hearings held
by either the House Ways and Means subcommittee on Oversight or the House
Energy and Commerce subcommittee on Oversight and Investigations.
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- Rep. Amory Houghton (R-N.Y.), chairman of the House Ways
and Means subcommittee on Oversight, who spent years as an executive officer
at Corning Glass and holds a master's degree in business administration
from Harvard Business School, tells Insight that the subcommittee didn't
ask about this because it just wasn't focused on the Endowment Fund. "We
were trying," Houghton explains, "to get the proportions of the
situation. The question is how much should the ARC keep in reserve for
future needs and how much should they release." You see, Houghton
says, "There is nothing wrong with building up a reserve, but the
problem comes when they have to decide how much is used for immediate needs
and how much should be kept for assistance down the road. If you or I were
in charge we may have done this differently. Ö It's a never-ending
argument, but they've done a pretty good job. Our job is to take a look
at the issues and, if there are problems, to shed some light on it."
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- With none of the lawmakers on either the House Ways and
Means or Energy and Commerce subcommittees asking any specific questions
(or even raising the issue) about the Endowment Fund or the $1.5 billion
in investments, it is hard to imagine how any light can be shed on the
issue. Nor did anyone ask why the ARC might need to move Liberty Fund monies
to a reserve fund when, according to Campbell, there was $1.5 billion in
invested reserves, not a cent of which was spent to assist the victims
of Sept. 11.
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- It is being reported in the national media that Healy
will leave her position at the end of the year under a cloud because of
a scrap with the board about the manner in which the Liberty Fund was managed.
But an insider at the ARC tells Insight that Healy "is being forced
out because the board didn't like her management style and she had found
out a lot of bad things the board was doing."
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- The spin has been cyclonic. Although her departure date
is scheduled for Dec. 31, Healy quickly was shoved aside by interim CEO
Harold Decker, former general counsel of the organization. Healy had said
in the hearings that the situation was under control and therefore no more
money would be collected for the Liberty Fund, again raising questions
about what would be done with the hundreds of millions withheld from the
victims. Decker explained coolly that the ARC "has enough [money]
to cover the anticipated needs" and any donations received after Oct.
31 would be placed in the Disaster Relief Fund used to cover the expenses
of all domestic disasters, sticking with the decision of the board to withhold
more than $200 million from the victims.
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- Closer to ground zero, however, the way in which the
Liberty Fund was to be distributed had New York Attorney General Eliot
Spitzer threatening legal action. He had testified before the House Ways
and Means subcommittee on Oversight that a case could be made that the
Liberty Fund violated consumer-protection laws, charitable-giving regulations
and its own charter. Spitzer told lawmakers that the decision by the American
Red Cross to withhold funds for other purposes "amounts to a violation
of the trust that the American public gave them."
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- The legal threat associated with the mishandling of the
Liberty Fund and reports first made by Insight that the ARC was playing
fast and loose with blood collection (see "Too Much Blood on Their
Hands," Oct. 15), turned into a public-relations nightmare. Apparently
trying to reverse the spin, the ARC suddenly announced it would offer to
refund donations to contributors who complain and would reverse its decision
to skim a few hundred million dollars from the Liberty Fund. According
to interim CEO Decker, "Americans have spoken loudly and clearly that
they want our relief efforts directed at the people affected by the Sept.
11 tragedies. We deeply regret that our activities over the past eight
weeks have not been as sharply focused as America wants, nor as focused
as the victims of this tragedy deserve."
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- David McLaughlin, chairman of the ARC Board of Governors,
added further unction. "The people of this country have given the
ARC their hard-earned dollars, their trust and very clear direction for
our Sept. 11 relief efforts. Regrettably, it took us too long to hear their
message. Now we must change course to restore the faith of our donors and
the trust of Americans and, most importantly, to devote 100 percent of
our energy and resources to helping the victims of the terrorist attacks."
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- Critics see this new turn of events as a day late and
a dollar short to restore the trust the ARC enjoyed before the Sept. 11
attacks. But, say friends of this important American charity, confession
of wrongdoing and assurance that all the donations raised by the Liberty
Fund now will be used for victims of the attacks is a step in the right
direction.
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- Kelly Patricia O'Meara is an investigative reporter for
Insight.
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- http://www.insightmag.com/main.cfm?include=detail&storyid=14807
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