Foundations, nonprofit leaders weigh in on Otto Bremer Trust lawsuits

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Offices of the Otto Bremer Trust, one of the Midwest’s largest philanthropies. (Courtesy of Otto Bremer Trust)

Paul Olson is of two minds when it comes to the legal fight that has pit the three leaders of the Otto Bremer Trust, one of Minnesota’s largest philanthropies, against its major financial asset, the St. Paul-based Bremer Bank, one of the state’s largest farm lenders.

Olson, the president of the Blandin Foundation from 1978 to 2003, said he believes it’s time for the Otto Bremer Trust to sell its bank and reinvest the proceeds. Under federal tax law, most private foundations attached to private businesses were forced to do the same decades ago.

“They could increase their (charitable) payout, one of the biggest in Minnesota, to be right up there with McKnight and Cargill (foundations),” Olson said.

© Provided by Twin Cities Pioneer Press
Offices of the Otto Bremer Trust, one of the Midwest’s largest philanthropies. (Courtesy of Otto Bremer Trust)

But it’s also time, he said, for Otto Bremer Trust’s three trustees to step down. Annual salaries that in two of the three cases exceed $500,000 are evidence to Olson of self-dealing, and after firing their executive director in 2014, the only board or supervising authority the trustees report to is themselves.

“What I think $500,000 a year represents is private inurement at its worst,” said Olson. He noted that every penny that goes to trustee salaries is one less penny for charity.

“The two presidents of our higher education systems make about the amount paid to two Bremer trustees,” he said. “But the academic leaders got their appointments on the basis of a national search, not from their fathers.”

EXPERTS WATCHING BREMER LEGAL FIGHT

Given its high-profile philanthropic role, charities and foundation experts are watching the recent legal fight surrounding the Otto Bremer Trust with more than passing interest.

In October, the board of Bremer Bank sued Otto Bremer Trust trustees S. Brian Lipschultz, Daniel Reardon and Charlotte Johnson in Ramsey County District Court for attempting to sell controlling shares in the bank to 19 out-of-state hedge funds and outside investors.

The stated goal was to replace the bank board and position the bank for a sale or merger that would expand the Trust’s assets. The plaintiffs noted a sale could increase annual compensation for the trustees from the $300,000-to-$500,000 range to as much as $1.8 million.

In the early 2000s, the trustees were each paid a base salary of less than $42,000.

“I’m not an expert on what the harm or benefit would be to the community of selling the bank, but given their past decisions, it makes me highly suspicious of their motives,” said Aaron Dorfman, president and CEO of the National Committee for Responsive Philanthropy.

Civic leaders have expressed concern about potential out-of-state ownership for the long-standing St. Paul-based farm lender, and even some proponents of a bank sale have been taken aback by the process.

“Have the bank become its own business before the bank is sold,” said Judith Healey, a past president of the Minnesota Foundation. “If they sell the bank as it is, it looks like they’re selling the foundation, and that’s bizarre.”

The trustees have filed counterclaims saying that bank officials are simply trying to save their own jobs while getting in the way of the Trust’s fiduciary duty to do what’s best for the philanthropy. A bank sale could double assets on hand.

ATTORNEY GENERAL SEEKS TO REMOVE TRUSTEES

The private foundation, which made a record $50 million in grants, loans and strategic investments in 2018, listed $1.2 billion in assets at the end of that year. About half of the grants and investments were in the Twin Cities metro.

“Otto Bremer Trust has been highly respected as one of the best rural funders in the region, and nonprofits care a lot about having this foundation succeed,” said Jon Pratt, the longtime executive director of the Minnesota Council of Nonprofits.

Bank employees and investors have filed legal claims of their own. Meanwhile, the Minnesota attorney general’s office last month asked a Ramsey County probate court to put all litigation on hold and remove the three trustees entirely.

Susie Brown, president of the Minnesota Council on Foundations, said she would not take sides in the legal dispute. But she welcomed Minnesota Attorney General Keith Ellison’s involvement “in ensuring that resources intended for public benefit are used that way,” she said. “We believe that it’s really important that … donor intent is adhered to. Donor intent, in this case, would be Otto Bremer himself.”

BREMER’S VISION VS. 1969 TAX LAW

For the courts, the limits of modern tax law will have to be weighed against the founding interests of Otto Bremer — a German immigrant who used his personal fortune to keep 55 banks afloat throughout the Midwest during the Great Depression.

Bremer died in 1951, just seven years after establishing a charitable foundation to oversee his bank network and redistribute its profits across the region.

In the late 1930s and ’40s, Henry Ford and the leaders of the Kellogg Co., Blandin Paper, Hormel Foods and dozens of other entrepreneurial success stories established charitable foundations to preserve their legacies. The charities, in some cases, were meant to allow the captains of industry to run their businesses from the grave.

As with the Otto Bremer Trust, founding documents often allowed foundation trustees to pick their own replacements, or reserved their seats for their children and grandchildren, many of whom had a strong hand in the company’s business dealings.

By the late 1960s, tax reformers had spotted too many conflicts of interest across the country. Time and again, corporate assets were shielded from taxes by being intermingled with those of the private philanthropies.

Signed into law by President Richard Nixon, the federal Tax Reform Act of 1969 aimed to put an end, said Olson, to “cozy things like giving your house to the foundation so they can rent it back to you for $1, or putting your wife on the payroll for $100,000.”

Most private foundations were forced by the federal Tax Reform Act to divest control of the private business that had fostered them. The Ford Foundation gradually sold its stake in the Ford Motor Co., and the Blandin Foundation sold Blandin Paper.

STRONG COMMITMENT TO RURAL MINNESOTA

But the trustees of the Otto Bremer Trust — then known as the Otto Bremer Foundation — hung onto Bremer Bank, with help from Minnesota’s nonprofit community.

“I testified in favor of it,” said Pratt. He recalled congressional hearings in the late 1980s, toward the end of the Trust’s 21-year reprieve on a bank sale.

“Part of their structure was (the bank) had very strong commitment to rural Minnesota, and part of North Dakota and Wisconsin,” Pratt said. “We did surveys, and nonprofits named Bremer the most accessible foundation in the state.”

The Bremer Financial Corp., the bank’s holding company, reorganized in 1983, dubbing its banks First American for a time. In 1989, the Trust sold 8 percent of bank ownership to bank employees, and the Bremer Bank name was adopted in 1998.

In addition to overseeing the Trust, the three trustees also hold seats on the bank board — a highly unusual dual role.

“It’s not like anything I’ve seen in the banking world or the foundation world,” said Healey, who once sat on the board of the First Bank of St. Paul.

SALARIES RISE FROM $120,000 TO $540,000

Over the years, leaders of some of Minnesota’s most respected foundations have raised alarm about how the three trustees — all of them descendants of Otto Bremer’s attorneys and advisers — were managing one of the state’s most respected philanthropies.

In June 2014, the trustees fired the Trust’s executive director, Randi Roth. They named themselves as co-CEOs and increased their base salaries, which had more than doubled to $285,000 three years prior.

The move drew sharp criticism at the time from the National Committee for Responsive Philanthropy, the president of the McKnight Foundation and other charitable leaders.

“In most foundations, you have a board that is not compensated at all, or modestly compensated, and they get to decide whether the CEOs are doing a good job running the philanthropy,” Dorfman said. “And if they’re not, they can let them go. … Where’s the accountability?”

The lack of oversight and co-mingling of duties still troubles Healey, a foundations consultant, former vice president of the Northwest Area Foundation and manager of the Weyerhaeuser Foundation.

“They can pay themselves huge salaries,” Healey said. “It’s untoward, and not acceptable under what I understand the law to be on foundations.”

But the trustees’ salaries were allowed by the courts at the time, which noted no pushback from then-Minnesota Attorney General Lori Swanson’s office. And those salaries have only grown since then.

Last year, the trustees’ base salaries were each $358,000, though Lipschultz and Reardon each earned more than $540,000 through additional management fees for overseeing non-bank assets.

That arrangement also raised eyebrows, given that the Trust had also hired Tealwood Asset Management in Minneapolis to manage non-bank assets. Trustee Johnson’s husband, Ward Johnson, was a prominent Tealwood employee from 2006 to 2018 and is currently its emeritus vice president.

Over the years, however, experts have pointed out that the Internal Revenue Service has been slow, if not reluctant, to intervene in foundation issues involving excessive compensation. Part of the issue is that founding documents are often silent on how much trustees should be paid, making it difficult to prove excess.

“These trustees are not hired by anybody,” Olson said, “and there’s nobody supervising them.”