NOTE: This is a reprint of a story that appeared in The Oregonian newspaper.

December 30, 1988 | Oregonian, The (Portland, OR)

Author/Byline: BILL MacKENZIE – of the Oregonian Staff | Page: A02 | 

Some of the nation’s most prominent business executives, politicians and entertainers have been donating thousands of dollars each year to an organization dedicated to providing scholarships to underprivileged young people. But most of the money has been going elsewhere.

From 1985 through 1987 — the latest period for which tax records are available — $2.1 million was raised by the Horatio Alger Association of Distinguished Americans Inc., an organization that purports to motivate young people and provide college scholarships to high school students from around the country.

The organization, which is based in Alexandria, Va., spent $1.7 million during those three years, $315,000 of that going to scholarships.

Rather than funding scholarships, most of the association’s outlays went to executive salaries, office expenses, books devoted largely to laudatory stories of the members’ lives, annual banquets at places such as New York’s Waldorf Astoria Hotel and the Westin Galleria Hotel in Houston and contracts with a New York public relations firm.

The amount of salary and benefits going to the association’s executive director alone, which increased from $98,126 in 1985 to $120,154 in 1987, has exceeded or almost equaled the amount of scholarships awarded in each of the past three years. Those scholarships totaled $100,000 in both 1985 and 1986 and $115,000 in 1987.

The association, which was founded in 1947, was named after Horatio Alger, who in the late 1800s wrote more than 100 books chronicling the adventures of boys who triumphed over adversity to achieve success.

The association was based in New York until its headquarters was moved earlier this year to Alexandria, a suburb of Washington, D.C.

The membership roster of the organization, consisting of people nominated for the Horatio Alger Award by current members, reads like a “Who’s Who in Politics, Business and Entertainment.

Oregon is represented by two members, Robert Farrell, operator of the Newport Bay Seafood Broiler restaurants; and Harry Merlo, chairman and president of Louisiana- Pacific Corp.

Also among the association’s living members — numbering about 250 — are President Reagan; former President Ford; Sen. Robert Byrd, D-W.Va.; and New York Gov. Mario Cuomo.

The association’s diverse membership also includes H. Ross Perot, president of Perot Systems Corp.; Allen Neuharth, chairman and chief executive officer of Gannett Co.; Sam Walton, chairman of Wal-Mart Stores Inc.; Tom Landry, coach of the pro football Dallas Cowboys; entertainers Ed McMahon and Bob Hope; the Rev. Norman Vincent Peale; and evangelist Billy Graham.

The association has declined to provide information on its income and expenditures, despite being contacted by a reporter from The Oregonian twice by telephone and twice by certified letter during the past seven months.

A call in early December to the executive director was referred to the association’s director of education, Pat Brown. Brown, who acknowledged receipt of earlier letters, declined to provide any detailed information concerning the association’s operations.

Love Smith, who served as the association’s executive director until earlier this year, also declined last week in a telephone conversation to answer questions concerning the association’s finances or general operations. “Since I’m no longer with the association, I really wouldn’t care to comment,” Smith said.

Peale, 90, who served as national chairman of the association for more than 25 years, could not be reached for comment. His wife, Ruth Stafford Peale, who has served on the association’s board of directors, spoke last week, however, on her own and her husband’s behalf.

Ruth Peale attributed the allocation of a limited proportion of the association’s annual income to scholarships to the association’s desire to raise an endowment. When she was advised that the association’s tax returns indicated that an average of 80 percent of annual income in the past three years had been spent, and only 20 percent of that on scholarships, Peale said she could not explain the discrepancy.

By not responding to requests for detailed financial information, the association has failed to comply with standards published by the New York-based National Charities Information Bureau Inc. and the Council of Better Business Bureaus Inc. of Arlington, Va., regarding financial disclosure by philanthropic organizations.

The Information Bureau says in its “Standards of Philanthropy”: “Descriptive and financial information for all substantive income and for all revenue-generating activities conducted by the organization should be disclosed upon request.”

Information on the association was obtained from Form 990 returns required to be filed with the Internal Revenue Service by organizations exempt from federal income tax and from annual financial reports submitted by the association to the New York Department of State.

According to the association, its good work is tied to inspiring young people to follow the Horatio Alger ideal and awarding $5,000 college scholarships to “underprivileged but promising” high school students from around the country who exemplify that ideal.

The New York-based National Charities Information Bureau, a national organization that monitors charitable giving, recommends that philanthropic organizations devote at least 60 percent of their annual expenses to their basic program and no more than 40 percent to management, general expenses and fund raising. Less than 20 percent of the Alger association’s annual expenditures have been going to scholarships in recent years.

The inspirational element of the association’s program consists largely of Horatio Alger Day programs at high schools around the country, during which association members share their success stories and offer advice before student assemblies.

According to Farrell, speakers usually live near the school sponsoring the event, so there is little expense involved. The association’s tax records do not break out expenses associated with the school visits; but the records show less than $16,000 annually devoted to travel, conferences, conventions and meetings from 1985 through 1987.

Scholarship expenses are more clearly defined in the association’s tax records.

During the 1985-1987 period, about $1 of every $7 of association income and $1 of every $5 of association spending went to scholarships.

The spending patterns of the San Francisco-based National Hispanic Scholarship Fund Inc., which also raises and distributes money to assist deserving college students, stand in sharp contrast to those of the HoratioAlger Association. In 1987, the Hispanic Scholarship Fund devoted 80 percent of its expenditures to scholarships and only 20 percent to administrative and fund-raising expenses.

Similarly, the Los Angeles-based Hugh O’Brian Youth Foundation, which also seeks to motivate high school students through sponsorship of leadership seminars and career fairs around the country, devoted 61 percent of its $1.5 million in expenditures directly to those activities in 1987; 39 percent of its budget went to administration and fund raising.

In 1987 the Alger association spent more on printing and publications than on scholarships. Its principal annual publication is a hard-cover book titled “Only in America Opportunity Still Knocks.” The 1987 book devoted 132 of its 192 pages to a membership list and biographies featuring informal snapshots of the members and outlines of their paths to success.

“Maybe that’s just being a little ego trip for a lot of people in there,” Ruth Peale said.

The records obtained from the IRS show that some young people are benefiting from the association’s programs. During 1985-87, for example, each of 63 students received $5,000 college scholarships from the association.

There is a question, however, as to whether the members of the association are benefiting financially from their connection to the association more than the students are.

Because the association is a non-profit organization exempt from federal income tax, contributions to it are tax-deductible. Maximum marginal tax rates were 38.5 percent in 1987 and 50 percent in 1985 and 1986. If all the contributors to the Horatio Alger Association paid federal income taxes at the highest marginal income tax rates during 1985-1987, the total tax burden of the contributors could have been reduced by $732,246.

In other words, the tax loss to the federal government could have been more than double the $315,000 in scholarship awards made by the association during 1985-1987.

When told of the association’s spending patterns: Farrell said, “That’s shameful not to give out more. It sounds like they are mismanaged.”

Farrell said he had little to do with the association other than winning an award and knew little of the association’s “inner workings.”