Something for the Little People

The Twin Cities-based Northwest Area Foundation has a $450 million endowment to use on charitable programs. So why has it been nearly invisible for years?

On a Monday evening in February, 200-plus people gathered in a ballroom at the International Market Square building in the shadows of downtown Minneapolis. Silver and blue balloons floated above tables draped in white tablecloths. The standing-room-only crowd nibbled on smoked salmon and chicken wings and sipped white wine and bottled water. State legislators Linda Higgins and Keith Ellison worked the crowd, as did Minneapolis Mayor R.T. Rybak and County Commissioner Mark Stenglein.

There was good reason for everyone to celebrate. The event marked an announcement by the Northwest Area Foundation, one of the largest grantmakers in the state of Minnesota, that it would spend up to $10 million over the next decade to battle poverty on the city's near-north side. As Mayor Rybak quipped when he addressed the crowd, "Nobody has to thank me for coming to some place where people are giving away money."

The grant announcement was the culmination of more than three years of planning. Since the Northwest Area Foundation first approached residents of the north side about the possibility of a multi-million dollar commitment, countless meetings had been held, reports generated, and consultants hired. City Council member Natalie Johnson Lee, who worked on the project in its early stages, compared the experience to childbirth. "So now the baby is here and the work begins," she told the audience. City Council member Barb Johnson offered a different analogy for the project: "Going through some of this process I thought I was in purgatory," she said, only half joking.

The February event was also notable because it was one of the first tangible signs of what the Northwest Area Foundation has been up to over the last seven years. In June of 1996, the $425-million, St. Paul-based foundation, which was created in 1934 with proceeds from James J. Hill's railroad and timber empires, hired a new president, Karl Stauber. The next year it stopped accepting grant applications and announced that it was overhauling its philanthropic activities. Nonprofit groups in eight states, stretching from Iowa to Washington, (tracing the route of the Great Northern Railway), were left searching for new sources of revenue. In the 1996-97 fiscal year, more than 240 nonprofit organizations had received some $15 million in grants from the Northwest Area Foundation, ranging from $147,500 for Penumbra Theater Company in St. Paul to $33,055 for the King County Labor Agency in Washington. Roughly a third of these grants were made to Minnesota organizations.

The ensuing years have been mystifying. Northwest Area Foundation has seldom given out grants, while internal costs have skyrocketed. In the 1998-99 fiscal year, the foundation's stingiest, it gave out just $3.2 million dollars, or less than one percent of its endowment, according to Internal Revenue Service documents. Total salaries and benefits, meanwhile, have increased from roughly $1 million to $1.7 million over the last four years, a jump of 70 percent, and the number of employees has more than doubled. Travel expenses have roughly doubled over the same period, to more than half a million dollars. In 2002 Stauber was paid $238,000 in salary and benefits. According to a 2002 survey by the Minnesota Council of Nonprofits, the average compensation for top charity executives at organizations with an annual budget of at least $5 million was $119,417.

The foundation is also spending more than a quarter of a million dollars on rent each year at its recently renovated offices on the west side of St. Paul. There have been other peculiar payments too: McFarlane Media Interests, publisher of Insight newspaper, received $244,000 in the fiscal year that ended March 31, 2001, for "media coverage." And for a foundation whose mission is to fight poverty, the Northwest Area Foundation has made some dubious investments. At the close of the most recent fiscal year, the grantmaker had $350,000 worth of stock in Household Finance, a company that has been widely criticized for exploiting poor people through predatory lending practices.

"They have a super-low profile," says Jon Pratt, executive director of the Minnesota Council of Nonprofits. "It's this sleepy little place that has all this money, and who's watching the store?"

With the state government slashing social services, foundations cutting back on grantmaking because of sagging stock portfolios, and charitable donations in decline due to the poor economy, the disappearance of Northwest Area Foundation has become more frustrating than ever to area nonprofit groups. In March, for example, Catholic Charities announced that it was trimming 88 jobs in Minnesota--15 percent of its total workforce--because of revenue shortfalls. "With the Pawlenty administration, and what's going on with the economy, not having Northwest Area Foundation in the fight, it's something that you feel," says Louis King, executive director of Summit Academy O.I.C., a north Minneapolis nonprofit group that previously received funding from the foundation. George Boody, executive director of the Land Stewardship Project, in White Bear Lake, another former grantee, echoes those sentiments: "We certainly miss them--especially in times like these."

Frustration with the enigmatic foundation came to a head in November when a potential class-action lawsuit was filed by a farmworker in Washington state who had participated in a Northwest Area Foundation-sponsored anti-poverty program in Yakima County. After holding meetings in the area for months, the foundation pulled out of the county in August. The lawsuit seeks at least $1.25 million that the plaintiff claims Northwest Area Foundation promised.

"This is evidence of the most extreme frustration I've ever heard of," says Pratt. "People are just completely fed up, and they're speechless, and they're going to let the lawyers do the speaking."

The Northwest Area Foundation now faces a second legal battle stemming from the Yakima project. Mario Vargas, who worked on the Washington-state effort until he was fired in June, filed a lawsuit in March charging that the grantmaker illegally discriminated against him. He is seeking more than $75,000 in damages.

The Northwest Area Foundation's goal is to help alleviate poverty. Its mission is to give away money. So how has the foundation pissed off so many people? "It's not malevolence," argues Pratt. "It's just ineptitude."

 

In 1996 Karl Stauber set out to revolutionize philanthropy. The newly installed president of the Northwest Area Foundation was fresh from a stint in Washington, DC serving as an undersecretary at the U.S. Department of Agriculture, and the experience convinced him that traditional philanthropy had become obsolete.

The Northwest Area Foundation was established in 1934 by Louis W. Hill, son of the famous railroad baron. It was initially modeled on East Coast- and Chicago-area philanthropies set up by other industrial titans following the implementation of the federal income tax in 1913 to dispense their wealth--and ease their tax burdens. These foundations established a paradigm in which they often funded experimental projects in the hopes that, if they proved successful, the government would then provide the money to implement them nationwide. Everything from Head Start, which began as a Ford Foundation program, to the practice of painting white lines on the sides of highways, started out as philanthropic initiatives.

The Northwest Area Foundation emulated this model. In the ensuing decades it evolved into an eclectic grantmaker, funding everything from the arts to sustainable agriculture programs. When Stauber took over the reins there were 39 different philanthropic initiatives in place.

What he concluded during his tenure in the Clinton administration, however, was that the federal government was no longer prepared to fulfill its role in this philanthropic equation. "I argue that the world changed in 1994," says Stauber. "With the balanced-budget agreement we basically went from a 50-plus-year period of an expanding federal government to, I don't think I'm going to see, on the domestic side, an expanding federal government for the rest of my career."

Stauber is speaking from a conference room in the foundation's offices in the Drake Marble Building, a former marble factory on St. Paul's west side. He wears a forest-green cardigan sweater over a white oxford shirt, along with charcoal gray pants. Steel-rimmed glasses frame his bearded face. As he speaks, Stauber occasionally crosses his legs, wraps his hands around a knee, and lets his eyes roll skyward in search of inspiration. The overall impression is more campus intellectual than Washington power broker.

"People talk about philanthropy being the [research and development] field for the federal government and for state governments," says Stauber. "Well, if the federal government is out of the business of being activist on domestic policy, then foundations are producing a product that nobody wants to buy. So what we decided to do is to try and figure out a different way."

Unfortunately Stauber didn't know what that new way of philanthropy might be. He had concluded that the present system was broken, but he wasn't sure how to fix it. In order to find out, the Northwest Area Foundation initiated a painstaking process of studying how to proceed in its grantmaking. Focus groups, organized by the public-relations firm Himle Horner, were conducted in all eight states where the foundation had operations. Roughly two dozen policy papers--on issues such as health care, education, and poverty--were researched and written by staff members. More than 600 movers and shakers, from teachers to former governors, were sought out for advice. The methods of other grantmakers were scrutinized. A consultant was even hired to write a report about this soul-searching process.

In the meantime, nonprofit groups were left scratching their heads as to what exactly the foundation was up to. "I raised red flags at the beginning, saying, 'The way you're communicating this, people do not understand what you're doing,'" Pratt recalls. "'You need to be clearer. You're not doing the foundation a service right now.'"

Some staff members grew weary of the seemingly endless self-analysis as well. "I thought that we were spending way too much time talking to each other," says Tripp Somerville, who left the foundation in early 1999 after nine years. "We did not have a transparent process that anyone outside of the office could understand."

The long incubation process also caused potential problems with the Internal Revenue Service. Private foundations are required by law to spend, on average, five percent of their endowments on charitable purposes annually. Because the Northwest Area Foundation had essentially suspended its grantmaking--existing commitments were honored and longtime grantees were given a one-time severance check--there was very little money going out the door. Between 1996 and 2000, the foundation's average payout was just 4.6 percent, according to IRS documents. Even this is misleading, however. Private foundations are given wide leeway in what they can count as charitable expenses. Salaries, travel expenses, and legal bills are among the costs routinely counted as part of the five-percent payout. In the 2000-01 fiscal year, the Northwest Area Foundation reported spending $4 million on charitable pursuits, but less than $3 million of this was actually allocated in grants.

"My God, it just seems a shame," laments Joe Selvaggio, founder of the social-service agency Project for Pride in Living, and now executive director of the One Percent Club, a nonprofit group that encourages wealthy people to give money to charity. "I think the federal government, or some watchdog organization, should have gotten on them to spend."

What ultimately resulted from the Northwest Area Foundation's years of self-scrutiny is somewhat abstruse. Rather than spreading its money across the philanthropic spectrum, the foundation decided to focus exclusively on eradicating poverty. It also fundamentally shifted its approach to philanthropy. Instead of soliciting grant applications and then deciding which ones were worthy of money, the foundation decided to essentially establish its own anti-poverty programs. By far the most ambitious component of the overhaul is the "Community Ventures" project launched in 1998. Through this initiative the foundation intends to identify at least 12 communities, ranging from poor urban neighborhoods to rural areas hemorrhaging population, and spend a total of $150 million working with them for up to a decade on reducing poverty.

Rick Cohen, executive director of the National Committee for Responsive Philanthropy, says that the Northwest Area Foundation should be applauded for attempting to transform the lives of poor people. "Tell me the other foundations that have said their mission is to address poverty," Cohen says. But he also cautions that foundations risk becoming isolated from communities--and ignorant of their needs--when they stop accepting grant applications. "It's definitely a practice that everybody ought to be concerned about, where foundations provide most of their money through staff-initiated and staff-controlled programs as opposed to responding to the requests and proposals from groups on the ground."

So far, only four Community Ventures projects have gotten off the ground. These include operations in the rural community of Miner County, South Dakota; a three-county region in central Oregon; and the fledgling north Minneapolis project. Perhaps the most ambitious of these Community Ventures, the Indian Land Tenure Foundation, is not tied to any one geographic area. The nonprofit group was created last spring, after more than three years of planning, with a commitment of $20 million over the next decade from the Northwest Area Foundation. The goal of the Indian Land Tenure Foundation is to restore management and ownership of tribal lands to Native Americans. Through government seizures and private deals, the amount of territory in the eight-state region controlled by Indians has dwindled from 81 million acres in 1871 to less than 16 million acres today.

Another significant problem on reservation lands is allotment, whereby parcels of land have been divided over the years among heirs, resulting in no clear ownership. "It's a huge issue on a lot of reservations," says Cris Stainbrook, who left the Northwest Area Foundation last year to become executive director of the Indian land project. "We have some reservations with 3,000 owners on a single 160-acre parcel."

Ultimately the Indian Land Tenure Foundation hopes to operate nationwide, but will need resources well beyond what it's been promised by the Northwest Area Foundation. "We aren't where we need to be to address the issue," says Stainbrook. "We're projecting it's going to take $500 million to $600 million in private investment to get there."

 

When Stainbrook left the Northwest Area Foundation in February of last year, it appeared that another Community Ventures project was well on its way to becoming a reality in Yakima County, Washington. The project had been in the planning stages for more than a year. In January the Northwest Area Foundation's Yakima team had given a presentation to the grantmaker's board of directors and received accolades. "We took it to the January board meeting and everything looked on track," recalls Stainbrook. "I don't know what transpired after that."

Stainbrook was not the only senior staff member to depart for the Indian Land Tenure Foundation last year. He was joined by Howard Valandra, a community liaison at Northwest Area Foundation, who had been directly overseeing the Yakima project. In April, shortly after Valandra left, residents of Yakima County were informed that the project was being put on hold. Then in August, Stauber visited Washington and announced that the foundation no longer intended to fight poverty in that community.

Yakima County stretches over more than 4,000 square miles in south central Washington. The southern part of the county is dominated by farms producing fruit, wheat, and dairy products, largely tended by Mexican migrant farmworkers. In the center of the county is the Yakima Indian Reservation. Most of the wealth is concentrated at the northern end of the county, in the (predominantly white) city of Yakima. The median household income for the county is $35,000, according to the 2000 census, or about $11,000 less than Washington state as a whole. Twenty percent of the residents live in poverty.

According to the Northwest Area Foundation, Yakima County was simply too divided to mount an effective attack on poverty. "They are really very independent communities and they like being independent communities," argues Stauber. "Cooperation across those communities is fairly unusual. Instead you're more likely to see, at times, a pattern of conflict between those communities."

Residents of Yakima County, who had spent months attending meetings, identifying problems, and discussing possible solutions, were incensed by Stauber's announcement. "You never mentioned to us that we were doing anything wrong so that we could correct it," scoffs David Silva, a community organizer who worked on the project. "We are divided in the sense that we are different, but we have the same needs. Poverty does not discriminate."

In November, a potential class-action lawsuit was filed in federal court by Julio Romero, a Yakima County farmworker, charging the foundation with breach of contract. According to the lawsuit, Northwest Area Foundation promised to provide at least $1.25 million to Yakima County residents. In anticipation of that windfall, residents collectively spent more than 10,000 hours in meetings between December, 2001 and April, 2002. The lawsuit further charges that participants in the project--many of them poor, Mexican farmworkers--traveled long distances and took time off work to attend meetings that sometimes lasted an entire day. Approximately 300 people are potentially eligible to become plaintiffs.

The lawsuit is extraordinary in that it pits some of the poorest residents of the country, migrant farmworkers, against a $425 million foundation bankrolled by the timber and railroad empire of James J. Hill. "My grandfather came to work as a bracero in the railroad times," says Silva. "That money is out of the sweat of the Mexican workers and out of the stolen land of the indigenous people."

"Who are the poorest, most mistreated people?" asks Matthew Metz, the Seattle-based attorney who is representing the workers. "The Mexican migrants. The foundation basically turned their back on them in the name of advancing their anti-poverty program. It's just left a really bad taste in everyone's mouths."

The lawsuit is also remarkable because it is extremely rare for foundations to find themselves in court. After all, their mission is to give away money--a practice that usually elicits gratitude, not legal battles. "I have never heard of anything like it in my life," says Anne Kubisch, director of the Aspen Institute's Roundtable on Comprehensive Community Initiatives. "I've never heard of a grantee or potential grantee suing a foundation for not having given a grant."

There were initial talks of a settlement, but now both sides have dug in their heels. Metz is threatening an all-out publicity war against the foundation. He hopes to mobilize Yakima residents to mount protests in various communities where the foundation has operations, including at its St. Paul offices. Metz says any proceeds from the lawsuit will be deposited in a community trust to help poor people in the area. "There's not a lot of resources there right now," he notes. "The state's broke. The local governments are still dominated by Anglos who don't care about Mexicans very much. There was never any real wealth there so there are no foundations. There's really not a lot of opportunity."

Stauber insists that the foundation has done nothing wrong. He charges that the plaintiffs are simply trying to extort money from the Northwest Area Foundation by making threats. As evidence, Stauber reads from a letter that was sent to the foundation prior to the filing of the lawsuit. It promises a "long, bruising, time-consuming, and expensive legal and public relations fight with an angry community" unless the foundation ponies up some money. "Give us a million and a quarter or we'll go after you," Stauber bristles. "We feel that to settle is to send the message that any time one person in a community is unhappy with a decision we've made they can come after us and they get a big chunk of change. We are defending our ability to do innovative work with low-income communities." The grantmaker has filed a motion to dismiss that is currently pending.

Even if Northwest Area Foundation succeeds in having the class-action case thrown out, its legal troubles will not be over. Last month Mario Vargas filed a lawsuit in United States District Court against the Northwest Area Foundation, Stauber, and two other employees, charging that he was illegally discriminated against. He is seeking more than $75,000 in damages. Vargas was fired by the foundation in June after two years of employment, primarily working on the Washington State project. As the only native Spanish speaker on the project, he was crucial in mobilizing the migrant farmworker community in Yakima County. Vargas says he was reprimanded for speaking Spanish and had to put up with insulting jokes made by staff members. In addition, he believes he was pushed out because of his opposition to abandoning the Yakima project. "They started to look at character flaws in me and they started to question my loyalty to the foundation because I was not supporting the management decision to terminate the project," he says.

Vargas was let go after failing to pass a performance review. His attorney, Albert Goins, contends that this was simply a means to rationalize firing his client. "This performance plan, in our view, was really set up as a convenient way of justifying his discharge after they decided to abandon the Yakima project," says Goins.

Stauber maintains that the reason for Vargas's firing is simple. "We had performance issues about his work," he says. "Those were made clear to him, he refused to address them, and we terminated him." The foundation also points out that the Minnesota Department of Economic Security declined to award Vargas unemployment benefits.

Nearly a year after being fired Vargas has yet to find another full-time job. "I have landed some great interviews in town, but for some reason I've not been able to land a job and land on my feet," he says. Vargas is still battling poverty--only this time it's his own.

The success or failure of the Northwest Area Foundation's efforts to fight poverty will ultimately be judged in large part by what it accomplishes in north Minneapolis. Because the foundation is based in the Twin Cities--and because its grantmaking has long been disproportionately skewed towards Minnesota--this is where its efforts will be most tightly scrutinized.

Some north Minneapolis residents have been skeptical of the effort from its inception. "I looked at it as an utter waste of time," says Louis King, executive director of Summit Academy O.I.C., a nonprofit group that provides job-training services in north Minneapolis. "Been there, done that. It just sounded like social tinkering with no end game." For three years, as the planning process in north Minneapolis ground on and on, King's initial skepticism seemed prescient. "We've changed presidents; we've changed governors; we've had a recession," King summarizes the ensuing years. "Power is a seductive thing and it can lead to the road of ruin."

In the last three years many residents have joined King in watching the Northwest Area Foundation project from the sidelines. As the number of meetings mounted, with little progress to show for it, people became fed up. Countless hours were spent in "strategy circles" discussing such seemingly obvious issues as how to define poverty. "I'm one of those who just got worn out," says Folarin Ero-Philips, a north Minneapolis resident and executive director of African American Relief and Development Initiatives, a nonprofit group that works primarily with African immigrants. "A lot of community people were very fired up and very interested in the process, but there seemed to be a continuous dialogue that was just leading into the ocean."

Natalie Johnson-Lee, who worked as a consultant on the project in its early stages, says that residents began to fear that--as later happened in Yakima County--the money would never materialize. "Were they really gonna put their money where their mouth is?" Johnson-Lee recalls wondering. "It was unclear whether or not we'd be funded. It was always if, maybe, we can't promise. That got people frustrated."

Some of the people who did stay involved had a financial incentive to do so. Al McFarlane was actively involved in the project from its onset. His company, McFarlane Media Interests, publisher of Insight newspaper, received a $244,000 contract in 2000 for "media coverage." McFarlane did not return four calls from City Pages seeking comment. Stauber, however, maintains that the money is a perfectly legitimate expense. He says that it was used to pay for coverage in four different newspapers targeted at various ethnic groups so that residents could be kept abreast of the planning process. "Rather than speaking to the media, and having the media decide what the story is, it's a way to speak directly to the consumers who subscribe to that publication," Stauber says.

Whatever the missteps along the way, Northway Community Trust, the nonprofit group that was created to administer the project, is now poised to implement the plan that was three years in the making. Paul Bauknight, a north Minneapolis resident and architect, is chairman of Northway Community Trust. He's widely respected among community leaders in the area, even those who have criticized the project. Bauknight is sympathetic to the complaints of residents who grew frustrated and dropped out of the planning process. He himself stopped attending meetings for a while because it was too much of a time commitment. "There were days when I was, oh, I wish they could move a little faster," he laughs. "A part of it is there was a big push to achieve a lot of consensus. It's difficult to achieve consensus and it takes a long time to achieve consensus."

Even Bauknight has a difficult time explaining exactly what Northway Community Trust will do with the $10 million that it's set to receive from the Northwest Area Foundation over the next four years. "The idea here is that we're going to try and reduce poverty from a much broader base, systemically," he says. More specifically, the group intends to work with existing nonprofit groups, government agencies, and businesses to tackle issues that directly impact poverty: housing, health care, education, and economic development. In housing, for example, Bauknight says, Northway Community Trust will not directly build units, but rather provide grants or technical assistance to organizations that are developing affordable housing. "You'll never see a sign saying 'Northway Community Trust Commons,'" he maintains. "Our job is going to be much more to invest in the partnerships and help them succeed."

Over the next few months Bauknight will guide the organization in hiring staff and electing a new board of directors. "This is a very unique attempt to reduce poverty. It's new and therefore there's still a lot of work to be done to get it to the place where it needs to be," Bauknight cautions. "Negotiating the next months, to when we have our board election, the staff will be in place, and all that, is what causes me to lose sleep at night because there are a lot of things that could go wrong."

The outcome of the north Minneapolis project will not be known for years. Its success or failure will depend on whether Northway Community Trust ultimately helps to stem poverty in North Minneapolis--no matter how many meetings residents had to endure to make it happen. The Northwest Area Foundation and Karl Stauber may be viewed by history as visionaries--or hucksters. "We think we saw a community that was close to a tipping point," Stauber surmises, "where if a number of things can go right in north Minneapolis, then we believe that north Minneapolis is very well positioned to be a national model for how a challenged, troubled community has turned [itself] around."

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