ProPublica is a not-for-profit newsroom investigating abuse of power. This article was produced in collaboration with Spotlight PA and The Philadelphia Inquirer, who are members of the ProPublica Local Reporting Network. Spotlight PA is an independent, impartial newsroom based in Harrisburg.
Long ago, and to great excitement, business tycoon Milton Hershey announced that he had given away his world famous chocolate company, a gift to the school for poor orphans he had started with his wife.
"Well, I have no children – that is, no heirs," he said in 1923. "So I decided to make the orphans of the United States my heirs."
Hershey died in 1945, leaving behind a huge estate and company that would grow to sell more than 250 million candy bars a year. However, his generosity created a problem for the Milton Hershey School that many charities would envy: too much money.
Over the years board members who control Hershey's estate have invested in land, stocks, and bonds. They helped turn the corporate town of Hershey into a tourist destination that includes hotels, amusement park rides, golf courses, and a conference center – all part of the school's foundation, which also has a controlling interest in the chocolate company.
Federal tax law doesn't require organizations like Milton Hershey School to spend a certain amount each year on their community service. But the widening gap between school spending on poor children and actual spending has led alumni, a local probate judge, and the attorney general to urge the facility to do more.
Hershey's school funding has outgrown the Ford Foundation's. However, the school continued to receive criticism for helping only a fraction of the vulnerable children whom it was able to reach with its enormous wealth. New questions about his spending have surfaced after a former CEO was sued in early April for access to financial documents. He says he has been rejected for more than a year.
The richest school in the country is located on a sprawling, leafy campus adjacent to farmland in Hershey, Pennsylvania. It serves around 2,100 students from low-income families. The school was started as an orphanage where boys made their living on the Hershey dairy farms. Today it offers rigorous academics and full support services. Most of their students are in college.
In 1999, enrollment at the school was roughly the same as it was in the 1950s. The number of students doubled between 1999 and 2019. In the same period, the school's equipment has almost quadrupled and is now worth more than $ 17 billion.
John Kinnaird, a 1949 graduate who spent time with Milton Hershey over dinner as a student, said the businessman would have wanted his charity to spend more. "His heart was caring for orphans," he said.
The charity board members say they are doing what Hershey wanted them to do. Starting in 1909, Milton Hershey placed his estate in the Milton Hershey School Trust, the legal entity solely responsible for owning the Hershey estate and financing the school. Board members say they are bound by the school's founding document, the original charter signed by Hershey and his wife Catherine. To ensure that the school exists “permanently”, the deed states that the board of directors can only spend the income that is earned by the foundation, not the foundation itself. $ 16 billion of it – Hershey Co. stocks, real estate holdings, and other investments – is not issued according to the charter.
Despite this limitation, the school was not as generous as it could be.
The Inquirer, Spotlight PA and ProPublica researched the Hershey Trust and Milton Hershey School over the past year – their structure, expenses and the education the school provides. The news organizations found that for most of the years since its inception, Hershey's fortunes have generated more income than the school has spent. As early as 1934, Fortune magazine noted the "embarrassingly large surplus that accumulates in the school coffers". By 2020, the unspent income had grown to more than $ 1 billion, even though the school spends approximately $ 90,000 per student per year.
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The Hersheys gave the school's board the authority to accept more students when more income is fed in. (As the charter put it: "From time to time, when there are vacancies or an increased ability can be justified by income, others should be admitted.")
Crucially, however, the board members left the details of how many students should be admitted and how much income would warrant an expansion to the board members. In a 1999 ruling, however, a state judge wrote that the Hersheys' intentions were clear: "To look after as many children in school as their income allows."
Administrators say the school plans to grow to 2,300 students in the next few years. And last September, under pressure from the Attorney General to spend some of the money it had accumulated, the charity announced that it would use $ 350 million to build a network of six preschools across Pennsylvania, making the project its "largest private commitment." denotes its nature to early childhood education. "
Twice in the past decade, the charity, whose board members receive at least $ 110,000 a year, has been investigated by the attorney general, who checked that its spending had done enough to help the children. In both cases, the charity reached settlement agreements that ended the investigation and led to reforms.
In early April, former CEO Robert Heist sued for access to financial records that school officials had withheld for more than a year. Heist, who is still on the board, said he needed the documents to make sure the school fees are not wasted. The school claims in court documents that Heist's inquiries "constitute a fishing expedition"; The suit is still ongoing. Heist said in a lawsuit on Monday that he is seeking the documents to "better understand how millions of dollars cannot be budgeted or booked annually when it comes to" school operations "."
As a charitable organization, Milton Hershey School pays no federal or state income taxes. In return for these large savings, the school is expected to serve the common good through its stated purpose: housing and raising low-income children and children at risk.
"The tax breaks are intended to support public welfare efforts and not serve to accumulate wealth, especially at this historic moment when needs are so great," said Mae Quinn, a professor at the University of the District of Columbia School, who spoke about the Accumulation of Wealth at Elite Private Colleges.
»READ MORE: The Hershey School Beats A Pa. Network of six free early childhood centers with $ 350 million before
"We are constantly expanding our program and looking for ways to lift more children out of poverty and do better every day," Milton Hershey School spokeswoman Lisa Scullin said in a statement. "The act also requires the school to be funded forever," she said, adding, "prudent management is what makes this happen."
Hershey's directors say that when it comes to spending more, their hands are tied to the limitations of the original deed, particularly the requirement that they only spend the proceeds of Milton Hershey's assets – rents, interest, and stock dividends – not the wealth itself.
But in fact the restrictions can and have been relaxed. Since the school was founded, and even during Milton Hershey's lifetime, Board members have removed or rewritten portions of the charter.
For example, the certificate originally stated that the income from equipping the school could only be spent on the school itself. But in 1963 the board members decided there was too much unspent income and tried to divert $ 50 million to build a hospital on the land owned and used by the school. Such a change requires a legal process known as Cy-Pres, in which a trust seeks permission from the county probate court to change the terms of its deed while complying as closely as possible with the intentions of its founders.
The court agreed and construction of the hospital began. Some older alumni of the school are still bitter about this decision, believing it was inappropriate as Hershey's gift was only intended to fund the school for orphans, not other interests.
In 1970, the charity again applied for and received court approval to change the terms of the charter, this time lifting the request to limit school admission to "white male orphans". A few years later, the charter was changed again to allow girls and children from disadvantaged backgrounds, not just orphans, to be admitted.
And in another change, the charity received court approval last year for its plan to build and operate the six preschool centers across the state, breaking for the first time with the charter demanding that the school be "permanently in Derry Township." must be located, Pennsylvania, which also includes the city of Hershey.
The move came after Pennsylvania Attorney General Josh Shapiro said in court that treating the school's "significant accumulated income" was high on his agenda when he took office in 2017.
The preschool project, which will take five years to complete, represents a significant addition to the charity. For the first time in its 112 year history, it will and will serve poor children without having to live in the Hershey area reaches children under 4 years of age. When they are up and running, preschools cost approximately $ 55 million a year to run.
Even so, the $ 350 million initial phase of the project will consume only a fraction of the $ 1.2 billion in unspent revenue that has already been accumulated.
»READ MORE: Hershey School board member is suing wealthy school for access to its financial records
And as part of the preschool initiative, in a court-approved move, the charity will set up nearly $ 900 million in emergency reserves – enough to cover 2.7 years of running the Milton Hershey School. Experts say that nonprofits typically only keep spending in reserve for about a year.
By reclassifying the roughly $ 900 million as a rainy day fund, the charity made them unavailable for broader expansion.
Laura Otten, executive director of the Nonprofit Center at La Salle University, said that nonprofits' reserves are typically three months to one year in operating costs.
“Some say the maximum should never be more than two years. I haven't met a nonprofit with two years' worth of reserves, ”she said.
But Scullin, the Head Boy, said, "Given that the school has a single source of income that must be permanent, it is both common practice and prudent policy to have a reserve policy."
When the Milton Hershey School was founded in the early 20th century, it was common for trusts and foundations to limit their charitable expenses to the traditional income generated by their foundations.
From the 1970s onwards, the heads of foundations and non-profit organizations looked for loose rules and more investment flexibility.
To free up these community resources, Pennsylvania lawmakers passed law in 1998 that allows nonprofit organizations and charitable foundations to spend more money each year by adopting a broader definition of "income". Under the new law, charities and nonprofits could spend between 2% and 7% of the total market value of their assets, averaged over at least three years. The board members could simply vote to change their policies and keep "permanent records" of the decision. No judicial approval was required.
A year later, in 1999, the Hershey charity appeared ready to take advantage of the new law. Robert Vowler, then a member of the charity committee and president of the Hershey Trust Co., which manages the Hershey property, testified in court that the board members chose an annual spending quota of 3% of the school's assets. "The legislation is very good," he said. "We can use it to display the entire portfolio."
However, the board has not adopted the guideline. If it did, the school could be spending a lot more – an additional $ 166 million in 2019 alone. Vowler did not return calls seeking comments.
The news organizations' analysis of 20 years of tax documents found that the charity spends an average of 2.2% of its total assets per year on running the school. In contrast, foundations, foundations, and nonprofits – which don't just spend their traditional income – typically spend between 4% and 5% of their wealth every year, studies show.
The 1998 Act allowed other Pennsylvania charities to spend a greater percentage of their wealth. For example, the legacy trusts managed by the Philadelphia Foundation spend 5% annually based on the average value of trust assets over five years, said Pedro Ramos, President and CEO of the Foundation – even trusts that originally only spent their income.
Shapiro, the attorney general, said through a spokesman it was up to the Hershey charity to decide whether to invoke the 1998 Act called Act 141. At the same time, the attorney general stated that there was no reason the charity could not change its policy under the law and that it continues to "press for confidence to invest more resources in children in Pennsylvania".
At 99 years old, Ken Brady is one of the oldest surviving graduates of the Hershey Industrial School, as the school was originally called. He and his two brothers enrolled in December 1929 after their father died. Brady met Milton Hershey over dinner in one of the school's farmhouses and doing housework in the barn. When Brady graduated in June 1940, Hershey personally presented him with his diploma.
Brady says he's grateful that school saved him and gave him a future – so he's worried that he's not ready to take full advantage of Hershey's gift.
"Mister. Hershey took care of me," he said. "I feel obliged that other children have the same chance that I had."
He thinks Hershey wanted the school to serve as many children as possible. “Seventeen billion dollars? You should have thousands upon thousands of children. "
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