No candy-coating lack of charity at Hershey School

MARGO REED / Staff Photographer
With a $12.5 billion endowment, Milton Hershey’s boarding school for poor children has more money than Penn, but expends a fraction of its assets each year, albeit lavishly, on its small enrollment. Critics say the trust could do far more with the money pouring into its coffers from the multibillion-dollar chocolate company that funds it.
By Bob Fernandez / Staff Writer, bob.fernandez@phillynews.com
Sunday, Nov. 6, 2016

HERSHEY — Here amid the screaming riders of the Hersheypark roller-coasters and delighted customers of Hershey's Chocolate World is an educational institution unlike any other: a boarding school for poor kids that has more money than it can spend.

Gushing with cash, the charitable Milton Hershey School has amassed more assets than every elite private college-prep school in the nation.

Its endowment is about 25 percent larger than the University of Pennsylvania's and surpasses all but a half dozen of the country's best-endowed colleges.

But few know about this rich school on Homestead Lane that has a one-of-a-kind dilemma: how to spend a $12.5 billion fortune on at-risk children in an isolated campus in central Pennsylvania?

The Hershey School's answer: Expend only a tiny fraction of the charity's assets each year and do it lavishly on 2,000 students.

The $12.5 Billion Hershey School for impoverished children is rich in assets. Breakdown:
But it spends only a tiny fraction on its programs for poor children:

Unspent income or surplus

$800 million

School Facilities

$400 million

Hersheypark Entertainment and land

$500 million

Hershey Co. stock

$6.8 billion

Money spent on the school

1.9% or $237 million

Investment portfolio

$4 billion

SOURCES: Hershey School federal tax return, the Hershey Co., internal documents
NOTE: The amount spent on educational programs was 1.5% of assets, or $192.7 million. The charity reported $216 million in liabilities on its federal tax return for year ending July 31, 2015.

The Hershey School's per-student expenditures of $118,400 a year are roughly double the tuition and room and board for Harvard University and nine times the per-pupil expenditures at the Philadelphia School District.

Yet even this level of spending fails to dent the school's coffers, which grow by hundreds of millions of dollars a year, thanks to steady dividends from its main patron, the Hershey chocolate company, and investment gains in its portfolio.

"Ludicrous," said John Core, a nonprofit expert at the Massachusetts Institute of Technology. "You shouldn't be able to accumulate assets like that that are generating virtually no benefit to society."

Brian Galle, who teaches nonprofit law at Georgetown University, said Hershey's spending "is indefensibly low and the reason it's so low is because they can't seem to conceivably find any way to spend this pile of money."

Over the years, the school has considered ways to increase spending by creating satellite campuses and partnering with libraries and with public and charter schools. It even considered helping fund the struggling Girard College, the school in Philadelphia for grades 1 through 12 that has also evolved from an old benefactor.

None of those ideas came to fruition. Critics say Hershey leaders are more focused on land development, adding to the Hersheypark family attraction, and buying a now-defunct luxury golf course rather than dramatically enlarging its mission to help poor children.

 
Milton Hershey (center) and his wife Catherine left behind a 1909 deed calling for an orphanage for healthy white boys who would learn blue-collar job skills. Over the last roughly three decades the Hershey School has closed the trade shops and upgraded its curriculum to a college-prep curriculum.

The charity's history is to "buy golf courses and other unnecessary land" rather than serve current students better, or help more needy children in Pennsylvania, said Richard Berman, a former Manhattanville College president. "It's neither fiduciary nor moral."

Hershey spokeswoman Lisa Scullin points out the school is currently expanding by 300 more students, taking total enrollment to 2,300. Construction to house the new students started last month.

The expansion follows a doubling in size over the last 15 years, from 1,000 students.

Officials stress that the school must adhere to the limits of the founding 1909 deed, which limits spending.

Eric Henry, the chief executive officer of the Hershey Trust Co., said the charity expects to "spend every dollar" of its income and some of its reserves to expand the school to over the next five years to 2,300 children.

Officials also say they must be conservative with money because markets fluctuate, and their students are extremely poor and needy. Marketed as a "premier" boarding school, the Hershey School is free to low-income students who pass a screening process. Many feel lucky to be accepted. Among its services are dental care, anger-management classes, SAT preparation, a school uniform for each day of the week, job certifications, and college scholarships to qualifying students.

The school says its students score higher on state tests than average Pennsylvania students.

But the school also faces persistent problems, ranging from a shortage of students to abuses by staff.

Critics wonder why a free boarding school with so many amenities has to spend $2.4 million a year to promote itself to students, parents, and the public.

The Milton Hershey School lodges, feeds and clothes students on its campus, adding to its per-student costs. The U.S. Department of Agriculture estimates that it costs between $15,000 and $25,000 a year to raise a child.
SOURCES: Hershey School Federal tax return, Pennsylvania Department of Education, Expenditures on Children by Families, 2013

Federal investigators also have looked at whether the Hershey School expels students with mental-health problems.

Students and staff are spread out over more than 170 family-style homes on a vast property, which can be hard to monitor. A gun-toting school employee hid a camera in the bathroom for senior male students, leading 11 students to sue the school for privacy violations. They received a private settlement in July.

Still, Tatiana Ariola, 20, a 2015 graduate who now attends the Rochester Institute of Technology, believes in the school. A Scranton-area native, she enrolled in 2009 after her mother became sick.

"The biggest benefits, looking back," she said, "were having the basics of food, a nice home and people that cared for me, and a good academic structure."

Chocolate profits

The Hershey charity's good fortune stems from one source: its link to the $20 billion Hershey's candy company, which dominates half the U.S. chocolate market.

Epic sums from candy arrive thanks to Milton and Catherine Hershey's founding deed, a document that has been a blessing and a curse for the school for more than a century.

The deed enables the school to receive a steady stream of Hershey dividends and other investment income, putting its endowment on par with powerhouse universities like MIT.

But it also made the school hard to remold for the modern era. Changes must be approved by the Pennsylvania Attorney General's Office and the local Orphans' Court.

Hershey School per-student spending compared with tuition, room and board at select colleges
SOURCES: Hershey School Federal tax return, Pennsylvania Department of Education, University of Pennsylvania, Drexel, Princeton University, Swathmore College, Harvard University, Massachusetts Institute of Technology, Villanova, Rowan, Pennsylvania State University, Temple

Among the deed's embarrassing relics: It created an orphanage and trade school solely for white boys, giving preference to those from Pennsylvania.

By the early 1960s, the school claimed there weren't enough orphan white boys in America to be helped. So with a nod from the attorney general and the local courts, the charity diverted an inflation-adjusted $400 million in Hershey School funds to construct the Penn State Hershey Medical Center.

While it was a noble cause, the school had no experience running a major teaching hospital and eventually handed ownership to Pennsylvania State University.

Later in the 1960s, the Hershey School opened its doors to black orphan boys. Seeking broader appeal, the school abandoned the orphan- and male-only admissions in the mid-1970s. And it subsequently closed the trade shops that taught skills such as auto repair. All of these actions were deviations from the founding deed.

So change is possible.

Today millions of American children, boys and girls of any race, can qualify for admission. But the boarding-school business has flattened and is not as popular as it once was. Many children get homesick, leading to dropping out, or don't want to leave their families in the first place.

Hershey trustees continue to cite two deed restrictions that handcuff growth: a requirement that the school be solely based in Hershey (an Orphans' Court judge disagreed in 1999) and a provision that trustees spend only the "income" of the school's core assets.

According to the school's latest tax return for the fiscal year ending in summer 2015, it spent $237 million — or 1.9 percent of its assets — and enrolled 2,006 students.

But it could spend far more, Pennsylvania trust lawyers say. State lawmakers passed a law in the late 1990s that allows a charity to override legacy mandates like the one in the Hershey deed and spend up to 7 percent of assets in a year.

If the Hershey School were to double its spending to 4 percent of assets — a reasonable level, many experts say — it could finance a school budget of $450 million a year. At 7 percent, the school could spend $875 million.

Instead of expanding its mission to reflect its prosperity and higher income, critics say, the charity has evolved into a job-protecting institution that advances regional economic interests.

"They're hoarding their assets locally," said Ric Fouad, an activist alum who is president of the nonprofit group Protect the Hershey's Children Inc. "They haven't opened a single satellite campus. They have not funded a single program outside of Hershey. And the status quo is reinforced by an almost-perfect patronage delivery system that rewards Democrats and Republicans alike. Neither party has an interest in upsetting the gravy train."

Hershey School Enrollment Growth vs. Hershey Co. Growth
In 1918, Milton Hershey signed over ownership of his chocolate company to his orphan's trust to help finance the Hershey School. Since his death in 1945, chocolate company inflation-adjusted profits have grown exponentially faster than enrollment. The charity still holds 80% voting control of the company.
SOURCES: Hershey Co., Hershey Community Archives, Dauphin County Orphans' Court, The Milton Hershey School

The school now employs more teachers, house parents, aides, and administrators — about 2,100 — than it enrolls as students, 2,000, its tax return shows.

"They are not really running a charity," MIT's Core adds. "The real purpose of that charity is to hold the shares in the Hershey Co. so that nobody can take it over. Any other reason is not plausible."

This summer, the Hershey Co. board rejected a lucrative buyout offer from Mondelez International Inc. that would have added more than $1 billion to the Hershey School's assets.

Kent Jarrell, spokesman for the school and the Hershey Trust Co., says the charity is satisfied with returns from its 80 percent controlling stake in the chocolate giant. He said the charity must adhere to the "soundest means of administering the school" so it can be run in perpetuity.

Still, many people are intrigued by what the school could become. Its largesse "begs the question, What else could you do?" says Lucie Lapovsky, a consultant and former president of Mercy College in New York.

Meet the Managers

The two boards that rule the Hershey charitable empire are composed of the same individuals, collectively called "the managers."

They meet privately.

They choose their own successors and have gotten $6.9 million in compensation over the last three years — an unusual perk for a charity.

As a practical matter, they answer only to the state attorney general, who by law has broad oversight of charities.

But the state's top law enforcement agency has repeatedly failed to reform the school, a wide range of outside experts says.

It investigated and settled probes into the charity in 1994, 2002, 2003, 2013, and this year. The issues over time are repetitive: board self-dealing, high compensation, lack of educational expertise and long tenure, and inadequate enrollment.

In late July, the attorney general announced the ouster of five of the charity's longest-serving managers as part of the latest settlement.

The new attorney general, who will be elected Nov. 8, will be able to review potential appointees. So far the charity has not submitted any names.

Few outside observers expect the latest pact to have much effect, in part because the charity has almost unlimited funds and can outgun even the attorney general in future legal disputes.

The school also appears to be immune from outside criticism.

At most charities, donors flee when the institution mismanages its assets or bursts into the headlines.

But the Hershey School doesn't woo donors. Its funding comes from a successful Fortune 500 company and its multibillion-dollar investment portfolio.

Daniel Borochoff, president of CharityWatch, which rates nonprofits, doesn't evaluate the Hershey School for that reason.

"It does not have to operate well to compete for outside contributions," he said, "because its budget is guaranteed to be fully funded."

Finding students?

So what will happen to the school's billions?

The school recently broke ground on the $120 million project to add 300 students.

At a cost of $343,000 per new student, more than the median cost of a Hershey single-family home, the school appears to be confident of solid demand for more boarding students on its campus.

But an internal board presentation last October noted that student-growth targets "have been consistently challenging to meet by the beginning of each school year."

This would be consistent with concerns expressed at the charity dating to the 1950s, that there seem to be limits on how many orphans or poor children the charity can help in Hershey.

Last October the managers also considered two future growth options: a day care or day school, according to the leaked presentation.

A day care would cost up to $9 million and might have trouble attracting clients, given that there are at least 120 day-care centers nearby, the internal review found.

The need for new day care also is not great in Hershey. An Inquirer analysis of census data shows that just 540 children under age 6 live below the federal poverty line within a 20-minute drive of the Hershey campus.

By comparison, 28,520 children live below the poverty line within a 20-minute drive of North Philadelphia's Fairhill section.

10 growth options  
With cash surpluses expected into the 2020s, the Hershey School considered 10 growth options to deliver more charitable benefits to poor children in 2015. They were:
1. More student homes in Hershey
6. Post-Graduation Supports
2. Study year off campus for 8th & 11th graders
7. Private School Partnerships
3. Day School for elementary students
8. Charter School Partnerships
4. Distance Learning Unit
9. Children's Home Partnerships
5. Early Childhood Learning Center
10. Library Partnerships
SOURCE: "Strategic Growth Alternatives for Milton Hershey School after attaining 2,300 students" Board of Managers presentation, October 2015
Two proposals
At a meeting in October 2015, the Milton Hershey School board considered a proposal for an educational day care on its campus. Such a program would have minimal benefits to poor children because of the local demographics.
Number of children under age 6 in households with income up to 200 percent of poverty:
Up to 100
101 to 250
251 to 500
Over 500
Hershey School
Within a 20-minute drive of the Milton Hershey School
Children living in poverty
540
Children living within 200% of poverty level
1,840
North Philadelphia
Within a 20-minute drive of Fifth and Indiana Sts.
Children living in poverty
28,520
Children living within 200% of poverty level
45,600
SOURCES: Esri; Inquirer analysis of U.S. Census Bureau data from the 2010-14 American Community Survey, "Strategic Growth Alternatives for Milton Hershey School after attaining 2,300 students" Board of Managers presentation, October 2015

"If you were to pick a town that's middle class, Hershey would be the poster child," said Jonathan Klick, a professor at the University of Pennsylvania Law School who has written on Hershey. "This is not who [Milton] Hershey was looking to help."

Joseph Berning, an alum and longtime activist, said the school has no experience in day care.

“If you were to pick a town that’s middle class, Hershey would be the poster child.”
Jonathan Klick, a professor at the University of Pennsylvania Law School who has written on Hershey

"It's not their expertise. They should not be exporting this model to anybody," Berning said. "The scandalous truth is that the school has more money … than they can spend."

Robert Sitkoff, a Harvard Law professor who has studied the Hershey School, said that when a charity "has resources out-of-proportion to its mission, you invite waste and mismanagement because there is all this slack. The trend in the law is to expand the charitable purpose when there are more resources, not buy golf courses."

Scullin, the school spokeswoman, said the Hershey boards ultimately decided not to pursue a day care or a day school.

Instead, the school's current plan is to increase the help it gives to recent graduates while they're in college or technical schools. The school plans to send monthly text messages, make personal phone calls to alums, and answer financial-aid questions, Scullin said.

Critics call that another half-measure.

Richard Berman, the former Manhattanville College president, said, "It's unconscionable that thoughtful and responsible people like the Hershey trustees who have been given so much from the Hershey estate could not think of a way to spend this money and have a big impact in a state like Pennsylvania with half a million poor children and so many still in foster homes."

@bobfernandez1

MARGO REED / Staff Photographer
A statue of Milton Hershey's wife, Catherine, seen through a doorway at the school.

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