High cost of Hershey School-related boards

Four prominent Pennsylvania Republicans are earning more than a combined $1 million a year as directors on three boards connected with the Milton Hershey School, one of the state's wealthiest charities and the nation's largest residential school for disadvantaged children.

LeRoy Zimmerman, a former two-term attorney general who has headed the charity since 2006, earned the most, $499,996, according to the group's latest tax filing with the Internal Revenue Service.

The others are:

James Nevels, a Philadelphia investment manager, who was compensated $325,359 on two Hershey-related boards.

Former Gov. Tom Ridge, who is earning $200,000 a year on the Hershey Co. board.

Lynn Swann, former gubernatorial candidate and Pittsburgh Steeler star, who is making $100,000 a year on the board of the company that operates Hersheypark.

The Hershey organization is complex, including three for-profit companies: The giant candy-maker Hershey Co., the Hershey Entertainment & Resorts Co., which manages Hersheypark, and the Hershey Trust Co., the private bank that manages the huge endowment that operates the Hershey School. Each company has its own board.

There is a fourth board - the Board of Managers - that oversees the school, but those eight positions are held by the same eight people who make up the Hershey Trust Co., the most powerful of the organization's boards. In all, 21 individuals hold positions on the four boards.

Director compensation at the three for-profit companies in the Hershey organization has soared in recent years, despite a spate of problems afflicting their primary beneficiary, the Hershey School.

A plan to increase enrollment to 2,000 students had to be postponed and various programs cut because of the bad economy. The school also closed Springboard Academy, an expansive $40 million structure meant to boost student retention. The building was shuttered after just three years.

In May, the institution was shattered by news that administrators paid $3 million to settle claims by former students who said they were sexually abused by a man on campus. The attacks were made by Charles Koons, whom a Dauphin County prosecutor described as the most prolific pedophile in the Harrisburg area in recent times. Koons' mother was a longtime "houseparent" at the school.

The prevalence of Republicans and the level of compensation reflect the composition of the Hershey boards after a state-led restructuring of the organization in 2002 and a rapid rise in corporate director fees. Compensation at the for-profit Hershey Co. board, for example, more than doubled between 2002 and 2008 to $200,000 a year.

Spokeswoman Connie McNamara said last week that director fees were paid by the for-profit companies and not the school itself, so those fees had not deprived student programs of financial resources.

"It's a very complicated and labor-intensive board those people are on, and Roy Zimmerman chairs it," McNamara said of the main trust board.

Directors on the Hershey boards have historically been compensated, McNamara said, and they are "not chosen on the basis of their political party. It's simply not part of what is looked at."

Zimmerman, of Harrisburg, was appointed to the main Hershey board in 2002 to end a controversy over a prior board's decision to sell the candy company. He has been joined by at least two notable Democrats: Sheila Dow Ford and James Mead. Zimmerman, Ridge, and Nevels hold the most lucrative board positions in the Hershey organization.

In addition, the main regulatory agency for Pennsylvania charities is the state attorney general, which became an elective office in 1980. The state's voters have always elected a Republican, and Zimmerman was the first.

Zimmerman, 75, was not available to answer questions or provide comment, McNamara said.

Hershey-related director fees were detailed in the charity's most recent IRS 990 that was released in mid-June. Other information was available through the Securities and Exchange Commission.

The steady rise in director compensation inside the Hershey organization has led to concerns by some who believe charitable work has become lucrative.

"In Philadelphia, not only do prominent businesspeople serve on charitable boards without compensation, but in many cases they are expected to raise and contribute funds to the charity," John W. Schmehl, a partner with Dilworth Paxson L.L.P., said Friday. "The constant increase in board fees in Hershey is troublesome, even if they do come from subsidiaries of the Trust."

Schmehl represented a group of Hershey alumni in a lawsuit earlier this decade seeking changes in the operation of the charity.

The highest-paid board is at the candy company. Ridge, Nevels, and Zimmerman sit on the Hershey Co. board.

The most powerful board is the Hershey Trust Co., actually a 40-employee state-chartered bank with $8.5 billion in assets that manages the school's endowment of extensive real estate holdings and stock portfolio. There are eight members on this board, called "the trust board." The members of this board also oversee the school. Zimmerman is chairman of the trust board. Nevels is a member.

The third board oversees Hershey Entertainment & Resorts, which operates amusement parks, golf courses, and campgrounds. There are eight directors. They include Zimmerman, who is the chairman, and Swann.

Schmehl, the Philadelphia lawyer, noted that directors at the Hershey Trust Co. and Hershey Entertainment were paid more in compensation than the two companies returned in dividends to operate the charity in fiscal 2009.

Hershey Entertainment decided in 2006 to halt its dividend payments to reinvest in the Hotel Hershey and other properties, McNamara said.

"From 1997 to 2005, HE&R paid more than $13.6 million in dividends. In 2006, the board made a conscious decision that HE&R should invest in itself to remain competitive and profitable," McNamara said.

Hershey Entertainment restarted its dividends with a $2 million payment this month, McNamara said.

One curious trend at the Hershey School has been an explosion of management and administrative expenses, according to several years of IRS 990s.

Hershey School administrative costs jumped 236 percent to $55 million between 2001 and 2009, while student-related spending rose only 49 percent to $141.5 million.

Administrative costs were about 14 percent of the school's total operating budget in 2001, but by 2009 they were 28 percent.

Directors fees were not part of administrative overhead at the school, McNamara said, because they were paid by the affiliated companies - the candy company, the trust bank, or the entertainment operator.

Among the administrator expenses, though, were salaries for top employees. John "Johnny" O'Brien, school president, was paid $671,000 for the year ended Dec. 31, 2008. The pay package included $200,000 in retirement benefits and a $76,000 performance bonus.

O'Brien resigned in mid-2009 and was replaced by Tony Colistra, a former head of the trust board.

Other top-paid administrators included James Sheehan, the vice president of legal affairs for the Hershey School, who earned $407,317. Part of the compensation was paid by the Hershey Trust Co., McNamara said.

Though contained in the IRS tax documents, a year-over-year comparison of overhead expenses at the Hershey School is misleading, McNamara said, because the school shifted personnel and other costs from the student programs budget to the administration budget.

The school also has spent millions more dollars on outside financial advisers, McNamara said.

After adjustments, McNamara estimated that administration spending rose only 9 percent over the period, McNamara said.

"About 70 percent of what we spend is on direct student services and that is with a very conservative interpretation of IRS guidelines."

The 28 percent of the budget devoted to administration, is higher than that of a sampling of other educational institutions.

At the exclusive Deerfield Academy in Massachusetts, 21 percent of its budget was used for administration, according to its 990. The Lawrenceville School in the Princeton area, also a top boarding prep school, has administrative costs that are 15 percent of the budget.

Maybe the most comparable educational institution to the Hershey School is the Kamehameha Schools in Hawaii, which has an endowment of about $8 billion and serves thousands of native Hawaiians. Its administrative costs were 22.7 percent of the institution's budget.