Disclosure at Chimes puts donors in the dark

Chimes also failed to report business relationships with several members of
its 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 about
significant aspects of its operations.

The undisclosed compensation amounted to 75 percent of the $3.25 million
total pay and benefits received from 2000 through 2002 by the managers – Terry
A. Perl, chief executive; Albert Bussone, chief operating officer; and Martin
Lampner, chief financial officer – who oversee an array of Chimes operating
units.

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

The government requires nonprofit groups to disclose annually, in publicly
available IRS forms, “aggregate compensation of more than $100,000 from your
organization 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 been
included on the IRS reports for Chimes Inc. and its main subsidiaries so the
public could see the executives’ entire pay package.

“It certainly is a large amount of money passing through the organization
to individuals – individuals with multiple positions in multiple entities
seemingly making a very handsome income,” said Marcus S. Owens, former
director 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 on
each of the [returns],” which are often the public’s main source of
information 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 government
contracts set aside to employ the retarded and other disabled people in
janitorial and other service jobs, should also have disclosed the business it
did with its board members, experts said.

Form 990, which nonprofit groups must file with the Internal Revenue
Service and make available to the public, directs the organizations to report
whether, “directly or indirectly,” they did business with directors, trustees
or major contributors.

“The failure to disclose is simply wrong,” said Daniel L. Kurtz, a lawyer
in New York, former charity regulator and author of Managing Conflicts of
Interest: A Guide for Nonprofit Boards.

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

“This is an organization that is a valuable community resource. We’ve done
nothing wrong,” said Perl, Chimes chief executive. “We’re not playing games.”

The nonprofit group, which recorded revenue of $107.5 million in fiscal
year 2002, mostly from government programs and contracts, said it reported
Chimes Delaware executive pay on that organization’s IRS reports and was not
required 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 to
be reported to the IRS on the Form 990s of Chimes Inc. and main subsidiaries
for fiscal 2003 and in the future, the organization’s leaders said.

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

“We’ve done this according to what we felt were very strong, professional
and ethical standards,” said Douglas M. Schmidt, chief executive of Chesapeake
Capital Consultants Inc. and a board member at the affiliated Chimes
Foundation. “There are no skeletons here in terms of self-dealing or anything
like that.”

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

But independent specialists in nonprofit governance said Chimes’ executive
pay information should have been directly available to donors and the public
on the returns of Chimes Inc. and its core affiliates.

“Clearly, they should have … indicated how much these guys were paid by
Chimes Delaware” on the Chimes Inc. return, said Peter Swords, former
executive director of the Nonprofit Coordinating Committee of New York and
author of How to Read the IRS Form 990.

“If you’re paying through a bunch of different entities, and you’re not
being up front about reporting it, it can create the appearance of insider
abuse,” 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’s
business relationships with members of its boards.

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

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

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

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

“If you are going to have the privilege of being a federally tax-exempt
organization, 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 that
posts Form 990s on the Internet.

Perl received $1.55 million in pay and benefits from Chimes Delaware and
other Chimes organizations for fiscal years 2000, 2001 and 2002, but only
$486,261 was disclosed on the returns of Chimes Inc. and its main
subsidiaries. The rest was paid through Chimes Delaware and revealed only on
Chimes Delaware’s returns, which were not posted on GuideStar and were
provided 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 IRS
returns and Chimes documents. Bussone was paid another $759,976 through Chimes
Delaware 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 through
Chimes 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 four
Chimes Delaware employees – Perl, Bussone, Lampner and Perl’s wife, Martha –
were top executives for the main Chimes group. Two of Chimes Delaware’s four
board members were Terry Perl and Bussone.

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

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

But several tax specialists said tax status or business purpose is
irrelevant in determining whether organizations are related. And Chimes
Delaware appears to be linked to other Chimes entities closely enough to
require its executive compensation to be disclosed in their reports, experts
said.

“This structure certainly lends itself to the suggestion that it, at least
in part, was created to shield from public view the very high compensation
these three individuals are receiving,” said Kurtz, the lawyer who examined
Chimes’ filings.

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

The IRS says Chimes Inc. and its subsidiaries filed Form 990s through
fiscal year 2002, but it cannot confirm that Chimes Delaware filed a return
after 1999. GuideStar does not compile Form 990s from nonprofits organized
under 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 build
a national network.

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

The four Chimes Delaware employees worked on “board development” for Chimes
organizations and other affiliates, Chimes officials said. Chimes Delaware
also 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 and
decided more than a year ago to close Chimes Delaware and concentrate on
expanding in the Mid-Atlantic region, officials said. Chimes Delaware was
formally shut down four months ago.

Chimes board members said their executives’ pay, which includes a car
allowance that helps pay for leased Mercedes Benz automobiles for Perl, his
wife and Bussone, is reasonable and supported by a study by a hired
consultant. 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 speech
pathologist who joined Chimes in 1971, and Bussone, who was trained as a
special educator and joined Chimes in 1991, built the organization’s revenue
from about $10 million a decade ago to about $125 million for the fiscal year
that 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 institutions
that 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 benefits
of $530,018 in fiscal 2002, when the system had consolidated revenue of $122.5
million, 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 reported
revenue 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 the
acutely ill. Their CEOs are medical doctors. Kennedy operates a genetics
laboratory, a pediatric feeding disorders unit and other highly technical
operations.

Chimes and its affiliates, on the other hand, “are social service
organizations,” which typically pay executives less than hospitals, Kurtz
said. “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 the
public knows.”

Julie Lincoln, a Kennedy Krieger spokeswoman, said: “We are a very complex
academic and medical research center with NIH grants and operations throughout
the 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 Wise
Giving Alliance, a national charity watchdog based in Arlington, Va., said
Perl’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 they
are probably some of the largest charitable institutions in the country,” he
said.

For example, John Seffrin, a medical doctor who is chief executive of the
national wing of the American Cancer Society, which reported $327.2 million in
revenue 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 year
ending March 31, 2002, received pay and benefits worth $371,595 for the
period, 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 its
president, 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 all
corporations. Some Chimes board members, including Allan Levine, chairman of
the boards at Chimes Inc. and Chimes International, also do business with
Chimes. At least four Chimes board members have engaged in financial
transactions with Chimes affiliates.

Levine is chief operating officer of the Baltimore leasing firm Madison
Capital LLC. Madison has leased equipment for several years to Chimes District
of Columbia, which handles large set-aside janitorial contracts for disabled
workers. 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 no
reason to be ashamed about that or be concerned about it. They’re a wonderful
group. They do great work.”

Chimes D.C.’s Form 990 disclosed the value of the Madison deal but not
Levine’s connection with Madison.

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

Joel Margolis, a life member of Chimes Inc.’s board, has performed legal
services. Margolis declined to comment, but Perl said Margolis provided free
legal work to Chimes for years and just before he retired started charging a
nominal fee, “$416.66 a month for a period of two years.”

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Mark L. Joseph, a board member of Chimes Foundation, whose purpose is to
support Chimes and its affiliates, also is president of Baltimore-based Yellow
Transportation/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 believe
that it was appropriate to be reviewed by the board and to be publicly
disclosed to the board, and that contract was so done and reflected in the
minutes,” Perl said.

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

“What often happens is that a board member will offer `such a deal’ to the
board that really turns out not to have been such a deal after all,” Holland
said.

But Chimes said it is not required to report deals with board members on
its IRS forms if the price does not exceed the fair value of the product. It
refused to list the board members it is doing business with or to disclose
most financial details.

“Chimes has a long history of utilizing the talents and resources of its
board members,” the organization said in a written statement. “Since all
services and purchases are provided at or below market rate … it is not
appropriate 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 official
and associate professor of accounting at Susquehanna University. “It’s just
asking whether or not there’s a relationship. It just seems to me that
self-dealing is broadly interpreted to require disclosure of those kinds of
relationships.”

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 the
embarrassment? Do you have something to hide?”

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

Charitable donations to Chimes are substantial, though they account for a
small portion of its revenue. Most Chimes revenue comes from contracts with
government 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 to
cushion a budget shortfall at Chimes’ Intervals Residential Services division,
Perl said.

Perl, who said he recently took a 10 percent pay cut because of budgetary
pressures, warned that a newspaper story that did not report his pay “fairly
and evenhandedly” would hurt future fund raising – and services for the
disabled – 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 get
hurt.”

But experts say nonprofit executives such as Perl have a responsibility to
provide a clear picture of their organizations’ finances.

“It’s a privilege to be tax- exempt. It’s not a right,” said GuideStar’s
Coffman. “These organizations are being exempted from paying general taxes, so
essentially 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-care
programs, vocational training and other services for the disabled, and
performs government and commercial contracts with disabled workers. Chimes,
one of the largest employers of disabled janitors in the country, serves more
than 5,000 people from New Jersey to North Carolina and had revenue of $107.5
million for the fiscal year that ended June 30, 2002.