Disclosure at Chimes puts donors in the dark

Sun Reporter

The Chimes, a highly respected, Baltimore-based nonprofit group thatprovides jobs and care for the disabled, paid three top executives $2.44million over three years that it failed to disclose in Internal Revenue Service filings of Chimes Inc. and its main subsidiaries.

Chimes also failed to report business relationships with several members ofits boards, as required by the IRS, experts say.

Former IRS officials and other experts sharply criticized Chimes'disclosure practices, saying potential donors were left in the dark aboutsignificant aspects of its operations.

The undisclosed compensation amounted to 75 percent of the $3.25 milliontotal pay and benefits received from 2000 through 2002 by the managers - TerryA. Perl, chief executive; Albert Bussone, chief operating officer; and MartinLampner, chief financial officer - who oversee an array of Chimes operatingunits.

The payments, including $1.07 million for Perl, came from a nonprofitcorporation with just four employees, called Chimes Delaware, that derivedmost of its revenue from the main Chimes group.

The government requires nonprofit groups to disclose annually, in publiclyavailable IRS forms, "aggregate compensation of more than $100,000 from yourorganization and all related organizations" paid to executives or directors.

Independent nonprofit specialists who studied the Chimes returns said that,based on their analysis, the payments from Chimes Delaware should have beenincluded on the IRS reports for Chimes Inc. and its main subsidiaries so thepublic could see the executives' entire pay package.

"It certainly is a large amount of money passing through the organizationto individuals - individuals with multiple positions in multiple entitiesseemingly making a very handsome income," said Marcus S. Owens, formerdirector of the Exempt Organizations Division of the Internal Revenue Service,who examined Chimes' returns.

"It would appear there should have been a schedule consolidating that oneach of the [returns]," which are often the public's main source ofinformation about charities, said Owens, now an attorney for Caplin &Drysdale, a law firm in Washington.

Chimes, which has obtained tens of millions of dollars in governmentcontracts set aside to employ the retarded and other disabled people injanitorial and other service jobs, should also have disclosed the business itdid with its board members, experts said.

Form 990, which nonprofit groups must file with the Internal RevenueService and make available to the public, directs the organizations to reportwhether, "directly or indirectly," they did business with directors, trusteesor major contributors.

"The failure to disclose is simply wrong," said Daniel L. Kurtz, a lawyerin New York, former charity regulator and author of Managing Conflicts ofInterest: A Guide for Nonprofit Boards.

Chimes staunchly defended its reporting and said it has built a strongrecord of integrity.

"This is an organization that is a valuable community resource. We've donenothing wrong," said Perl, Chimes chief executive. "We're not playing games."

The nonprofit group, which recorded revenue of $107.5 million in fiscalyear 2002, mostly from government programs and contracts, said it reportedChimes Delaware executive pay on that organization's IRS reports and was notrequired to disclose the pay on returns for the other Chimes organizations.Chimes Delaware was a separate trade association, they contended.

A recent move to close Chimes Delaware will cause all executive income tobe reported to the IRS on the Form 990s of Chimes Inc. and main subsidiariesfor fiscal 2003 and in the future, the organization's leaders said.

Chimes officials also said the organization was not obligated to revealboard member transactions on its 990 forms.

"We've done this according to what we felt were very strong, professionaland ethical standards," said Douglas M. Schmidt, chief executive of ChesapeakeCapital Consultants Inc. and a board member at the affiliated ChimesFoundation. "There are no skeletons here in terms of self-dealing or anythinglike that."

Known as a well-organized, can-do group that attracts hundreds of thousandsof dollars in annual donations, Chimes revealed some details of itsoperations, including audited financial statements for the main Chimes groupand IRS returns for Chimes Delaware, in meetings and e-mail exchanges with TheSun.

But independent specialists in nonprofit governance said Chimes' executivepay information should have been directly available to donors and the publicon the returns of Chimes Inc. and its core affiliates.

"Clearly, they should have ... indicated how much these guys were paid byChimes Delaware" on the Chimes Inc. return, said Peter Swords, formerexecutive director of the Nonprofit Coordinating Committee of New York andauthor of How to Read the IRS Form 990.

"If you're paying through a bunch of different entities, and you're notbeing up front about reporting it, it can create the appearance of insiderabuse," said Stefanie Lindquist, an associate professor at the University of Georgia School of Law who examined Chimes' IRS filings.

Chimes' leaders continue to refuse to disclose many details of the group'sbusiness relationships with members of its boards.

At a time when executive pay and corporate governance loom large on thenational agenda, the Chimes disclosure practices suggest that accountabilityand transparency problems are not confined to Wall Street, nonprofitspecialists said.

Public disclosure and corporate governance are crucial for philanthropiessuch as Chimes, charities experts say, because nonprofit groups operate underfar less scrutiny than publicly traded, for-profit corporations.

Nonprofit groups have no shareholders to monitor them. They pay little orno tax, and because they are not a revenue source, the Internal RevenueService pays little attention. When nonprofits do business with board members,directors might be induced to place their interests above those of theorganization.

And, unlike for-profit companies, many nonprofit corporations, includingChimes, solicit donations from the public.

"If you are going to have the privilege of being a federally tax-exemptorganization, particularly a charitable organization taking contributions,then you have an obligation to be open about that activity," said Suzanne E.Coffman of GuideStar, a national database of nonprofit organizations thatposts Form 990s on the Internet.

Perl received $1.55 million in pay and benefits from Chimes Delaware andother Chimes organizations for fiscal years 2000, 2001 and 2002, but only$486,261 was disclosed on the returns of Chimes Inc. and its mainsubsidiaries. The rest was paid through Chimes Delaware and revealed only onChimes Delaware's returns, which were not posted on GuideStar and wereprovided to The Sun by Chimes in response to inquiries about executive pay.

Albert Bussone, the chief operating officer, received pay and benefits of$245,379 for the three years through the main Chimes group, according to IRSreturns and Chimes documents. Bussone was paid another $759,976 through ChimesDelaware that was not reported by the main Chimes group.

Martin Lampner, the chief financial officer, received pay and benefits of$77,926 through the main Chimes group, all in 2002, and $618,078 throughChimes Delaware for the three years, returns show.

For fiscal year 2002, the most recent for which information is available,Perl's pay and benefits totaled $542,101; Bussone's, $427,124; and Lampner's,$249,475, according to IRS returns.

Most Chimes Delaware revenue came from other Chimes entities, and all fourChimes Delaware employees - Perl, Bussone, Lampner and Perl's wife, Martha -were top executives for the main Chimes group. Two of Chimes Delaware's fourboard members were Terry Perl and Bussone.

But Chimes leaders said their income from Chimes Delaware should not beincluded in the consolidated executive income report provided to the IRS forthe main Chimes group because Chimes Delaware was organized under a section ofthe tax code reserved for chambers of commerce and other nonprofit tradeassociations.

"Trade associations do not report members as related corporations on 990nor do they aggregate the wages of members for reporting purposes," Chimessaid in a written statement.

But several tax specialists said tax status or business purpose isirrelevant in determining whether organizations are related. And ChimesDelaware appears to be linked to other Chimes entities closely enough torequire its executive compensation to be disclosed in their reports, expertssaid.

"This structure certainly lends itself to the suggestion that it, at leastin part, was created to shield from public view the very high compensationthese three individuals are receiving," said Kurtz, the lawyer who examinedChimes' filings.

In contrast to Form 990s filed for the main Chimes groups, which are neatlytyped and appear complete, the Chimes Delaware form for fiscal 2002 ishandwritten and, accounting experts say, contains missing entries.

The IRS says Chimes Inc. and its subsidiaries filed Form 990s throughfiscal year 2002, but it cannot confirm that Chimes Delaware filed a returnafter 1999. GuideStar does not compile Form 990s from nonprofits organizedunder that section of the tax code.

Chimes officials strongly deny trying to shield their pay from public view,saying that Chimes Delaware was a separate entity created to help Chimes builda national network.

Chimes, which provides group homes, training and education, as well as jobsfor the disabled through government set-aside programs, said it intended tolink with similar organizations across the country through Chimes Delaware toachieve economies of scale.

The four Chimes Delaware employees worked on "board development" for Chimesorganizations and other affiliates, Chimes officials said. Chimes Delawarealso purchased and managed products such as computer and payroll services.Many of the services were purchased from other Chimes Inc. affiliates.

Through fiscal years 2000, 2001 and 2002, Chimes Delaware took in more than$3 million in revenue from the Chimes core group, documents show.

Ultimately, Chimes leaders changed their minds about a national network anddecided more than a year ago to close Chimes Delaware and concentrate onexpanding in the Mid-Atlantic region, officials said. Chimes Delaware wasformally shut down four months ago.

Chimes board members said their executives' pay, which includes a carallowance that helps pay for leased Mercedes Benz automobiles for Perl, hiswife and Bussone, is reasonable and supported by a study by a hiredconsultant. Bussone's wife also works for Chimes and makes less than $100,000,officials said.

Board members note that Perl, a clinically trained audiologist and speechpathologist who joined Chimes in 1971, and Bussone, who was trained as aspecial educator and joined Chimes in 1991, built the organization's revenuefrom about $10 million a decade ago to about $125 million for the fiscal yearthat ended in June, while substantially increasing services for the disabled.

In calibrating its executive pay, Chimes looked at the Kennedy Krieger Institute and Sheppard Pratt Health System, two other Baltimore institutionsthat treat the developmentally disabled and have annual revenue of more than$100 million, Chimes officials said.

Sheppard Pratt's president, Steven S. Sharfstein, received pay and benefitsof $530,018 in fiscal 2002, when the system had consolidated revenue of $122.5million, a spokeswoman said.

Kennedy Krieger President Gary W. Goldstein earned pay and benefits of$751,133 that year, according to an IRS filing, and the institute reportedrevenue of $159.1 million, a spokeswoman said.

But Kurtz, who specializes in nonprofit practice at the law firm of Holland& Knight in New York, questioned whether the institutions are similar.

Kennedy Krieger and Sheppard Pratt run inpatient hospital units for theacutely ill. Their CEOs are medical doctors. Kennedy operates a geneticslaboratory, a pediatric feeding disorders unit and other highly technicaloperations.

Chimes and its affiliates, on the other hand, "are social serviceorganizations," which typically pay executives less than hospitals, Kurtzsaid. "This is not an acute-care organization. This is not a university."

Chimes' total revenue makes it "a substantial institution," Kurtz said,"but I think they've gone to some pains to be less than candid about what thepublic knows."

Julie Lincoln, a Kennedy Krieger spokeswoman, said: "We are a very complexacademic and medical research center with NIH grants and operations throughoutthe United States. It just seems ludicrous to us that we would be compared to[Chimes] in any way."

Bennett Weiner, chief operating officer of the Better Business Bureau WiseGiving Alliance, a national charity watchdog based in Arlington, Va., saidPerl's pay would be "at the higher end of the spectrum," even for large,national nonprofits.

"There are some organizations that approach that level of salary, but theyare probably some of the largest charitable institutions in the country," hesaid.

For example, John Seffrin, a medical doctor who is chief executive of thenational wing of the American Cancer Society, which reported $327.2 million inrevenue for the fiscal year ending Aug. 31, 2002, earned pay and benefits of$531,638 for the period, a Form 990 shows.

Robert Ross, chief executive of the national Muscular Dystrophy Association, which recorded $161.5 million in revenue in the fiscal yearending March 31, 2002, received pay and benefits worth $371,595 for theperiod, according to an IRS filing.

Blind Industries and Services of Maryland, a Baltimore-based nonprofit with$47.8 million in consolidated revenue for fiscal 2002, compensated itspresident, Frederick Puente, with $171,345 in pay and benefits for the period,an IRS return shows.

Setting executive pay is a primary duty of the board of directors at allcorporations. Some Chimes board members, including Allan Levine, chairman ofthe boards at Chimes Inc. and Chimes International, also do business withChimes. At least four Chimes board members have engaged in financialtransactions with Chimes affiliates.

Levine is chief operating officer of the Baltimore leasing firm MadisonCapital LLC. Madison has leased equipment for several years to Chimes Districtof Columbia, which handles large set-aside janitorial contracts for disabledworkers. As of June 30, 2002, Chimes D.C. owed Madison $387,144.

"Our business is below market level in most cases," said Levine. Chimes is"a minuscule part of my business overall. I see no conflict. And I see noreason to be ashamed about that or be concerned about it. They're a wonderfulgroup. They do great work."

Chimes D.C.'s Form 990 disclosed the value of the Madison deal but notLevine's connection with Madison.

Huell E. "Skip" Connor Jr., a strategic consultant for Chimes, sits on theChimes Inc. board. Connor did not return telephone calls seeking comment, butboard member Douglas M. Schmidt said: "Every board member and affiliated boardmember is aware of Skip's relationship with the organization."

Joel Margolis, a life member of Chimes Inc.'s board, has performed legalservices. Margolis declined to comment, but Perl said Margolis provided freelegal work to Chimes for years and just before he retired started charging anominal fee, "$416.66 a month for a period of two years."

Mark L. Joseph, a board member of Chimes Foundation, whose purpose is tosupport Chimes and its affiliates, also is president of Baltimore-based YellowTransportation/Connex, which provides transport services for Chimes.

Joseph declined to comment on the record, but Perl said Chimes'Yellow/Connex contract was competitively bid.

"It was a multiyear, very large contract, and for that reason I believethat it was appropriate to be reviewed by the board and to be publiclydisclosed to the board, and that contract was so done and reflected in theminutes," Perl said.

The IRS requires nonprofit groups to publicly disclose business deals withboard members to guard against insiders padding the price of the product theysell, leaving less money for the nonprofit's work, said Thomas Holland,co-director of the Institute for Nonprofit Organizations at the University ofGeorgia and a specialist in nonprofit governance.

"What often happens is that a board member will offer `such a deal' to theboard that really turns out not to have been such a deal after all," Hollandsaid.

But Chimes said it is not required to report deals with board members onits IRS forms if the price does not exceed the fair value of the product. Itrefused to list the board members it is doing business with or to disclosemost financial details.

"Chimes has a long history of utilizing the talents and resources of itsboard members," the organization said in a written statement. "Since allservices and purchases are provided at or below market rate ... it is notappropriate to include this data on the 990s."

Independent experts dispute that interpretation.

"It doesn't necessarily mean whether you're doing it at a profit or not,"said Richard Davis, a certified public accountant, lawyer, former IRS officialand associate professor of accounting at Susquehanna University. "It's justasking whether or not there's a relationship. It just seems to me thatself-dealing is broadly interpreted to require disclosure of those kinds ofrelationships."

Even if Chimes got a good deal from vendors who are members of its board,"that does not allow them to not disclose it" on their IRS forms, Kurtz said.

"What's wrong with making it public?" asked Holland. "What's theembarrassment? Do you have something to hide?"

One important reason that nonprofit groups are required to discloseexecutive pay and business deals with board members is to give donors a chanceto weigh that information before writing checks to the organizations.

Charitable donations to Chimes are substantial, though they account for asmall portion of its revenue. Most Chimes revenue comes from contracts withgovernment entities to employ or provide services for the disabled.

In fiscal year 2002, total fund raising came to $1.49 million, Perl said.Chimes Foundation holds assets of about $3.8 million, according to Lampner.

Donations to Chimes are important for supplementing government funding,particularly now when states face budget pressures, agency officials said.

In fiscal 2002, for example, $719,446 in fund-raising proceeds were used tocushion a budget shortfall at Chimes' Intervals Residential Services division,Perl said.

Perl, who said he recently took a 10 percent pay cut because of budgetarypressures, warned that a newspaper story that did not report his pay "fairlyand evenhandedly" would hurt future fund raising - and services for thedisabled - but not his compensation.

An unfair story would "destroy - damage - an organization," Perl said. "Oh,we'll survive. My comp won't change, OK? But people with disabilities will gethurt."

But experts say nonprofit executives such as Perl have a responsibility toprovide a clear picture of their organizations' finances.

"It's a privilege to be tax- exempt. It's not a right," said GuideStar'sCoffman. "These organizations are being exempted from paying general taxes, soessentially they're being supported, at least indirectly, by the taxpayers.And taxpayers have a right to know how that money's being used."

Sun researcher Elizabeth Lukes contributed to this article.

What is Chimes?

The Baltimore-based Chimes organization manages group homes, day-careprograms, vocational training and other services for the disabled, andperforms government and commercial contracts with disabled workers. Chimes,one of the largest employers of disabled janitors in the country, serves morethan 5,000 people from New Jersey to North Carolina and had revenue of $107.5million for the fiscal year that ended June 30, 2002.

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