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Carter avoids blame game-so far: Museum proposal doesn't pass judgment on past practices

January 31, 2005

Now he's proposing a solution that's focused on the future-even as it tacitly endorses past spending practices at the Hamilton County living history museum.

His plan to establish an independent Conner Prairie and equip it with a $94 million endowment may well resolve the immediate issue, but it won't answer the questions that drew him into the matter in mid-2003.

"There have been serious claims brought to my attention about potential misallocation of trust funds that warrants review by this office," he said in a June 2003 written statement still posted online. "Our primary focus will be on whether or not charitable donations have been managed and distributed in the manner intended by the donors."

The central issue is what Indianapolis philanthropist Eli Lilly wanted when he gave Earlham College millions of dollars in Eli Lilly and Co. stock over several years, primarily to support Conner Prairie. Lilly had already asked the Richmond school to maintain the historic William Conner estate as a museum under the terms of a public charitable trust established in 1964. Carter maintains the stock contributions were additions to that trust; Earlham says they were gifts to the college.

For four decades, college and museum leaders have clashed over whether Earlham spent enough on Conner Prairie. The dispute spilled into the public arena in June 2003, when Earlham President Doug Bennett summarily fired museum CEO John Herbst and dismissed 27 members of Conner Prairie's 30-person board.

Bennett cited operating deficits that had accrued under the ousted leadership team's watch. The former board said they were being punished for raising questions about the museum's multimillion-dollar endowment.

The action ended years of discussions about freeing Conner Prairie from Earlham's control-a conversation the college later continued in closed-door sessions with the attorney general and his staff.

The public battle also continued, though, as Carter asked a Hamilton County court to order Earlham to account for its endowment spending over the 40-year history of the trust. Judge William Hughes did so in September, but the college has appealed that ruling.

Carter's settlement proposal, announced Jan. 22, would put an end to the legal maneuvering, free Conner Prairie, and divide the $174 million endowment Earlham and the museum share.

But it wouldn't pass judgment on whether Earlham's past endowment spending was appropriate. Although college leaders have repeatedly said Carter has found no wrongdoing, his response has been that Earlham hasn't given him enough information to make that determination.

Even so, he now says he knows enough to move forward.

"Obviously, I would like to have an accounting, but I have received other financial information with regard to spending by Earlham to run the museum," he told IBJ. "This is more than a legal matter; it's also a matter of public policy. ... And I made a decision not to put the legal determination ahead of that."

About a year ago, Carter recommended the museum be separated from Earlham and governed by a pair of independent boards. Since then, he's been working on how to allocate the assets-the endowment and more than 1,000 acres of Hamilton County land.

Carter enlisted the help of Bethesda, Md.-based FTI Consulting's local office to figure that out. Consultants reviewed past museum budgets to determine its financial needs, and figured out how to sustain that level of support.

Consultants came up with $4.9 million, the amount they say the museum needs annually from the endowment to sustain operations and allow for growth.

Then, making assumptions about investment returns and allowing for a 5-percent increase in the annual draw, they figured out how big Conner Prairie's endowment needs to be: $94 million.

FTI met several times with Earlham representatives and once with some of the former museum directors to discuss the findings, Senior Managing Director Gary Kleinrichert explained in a letter to Carter.

Neither was particularly pleased. Not surprisingly, the college thought the assessment of Conner Prairie's needs was too high. The former directors thought it was too low.

"I understand that both ... have different ideas regarding Conner Prairie's future needs," Kleinrichert wrote, going on to say FTI stands by its recommendation.

Earlham has not warmed to the idea, releasing a statement after Carter's announcement that both scorned the proposal and chided him for releasing it.

"Since the attorney general has chosen to make his negotiating position public, we feel obliged to comment that his consultant's suggested endowment level for Conner Prairie is based on seriously flawed accounting assumptions and projections that substantially inflate their estimates of Conner Prairie's short-term and future needs," read the statement, which was attributed to both college spokesman Lou Gerig and board chairman Mark Myers.

Myers did not return phone calls seeking additional comment. Gerig considered a list of written questions before replying that most "deal with areas Earlham does not want to discuss at this time because of the ongoing discussions with the AG's office."

A proposal Earlham submitted last March would have set aside $64.4 million of the shared endowment to benefit Conner Prairie.

Gerig did answer one question, however: Conner Prairie received $4.1 million from the endowment in 2004, down slightly from the $4.2 million it collected in 2003. Its annual budget is about $9 million.

"Earlham's decisions over the past 40 years ... have led to the current funding needs of the museum," Carter said. "We tried to use reasonable numbers."

Former museum directors have come to terms with their initial concerns, said exchairman Berkley Duck, who now leads expatriate group Save the Prairie.

"It's not perfect, but no compromise ever is," Duck said. "The only other option at this point appears to be litigation, and I don't see where that would do Earlham any good. I'm confident it wouldn't do Conner Prairie any good."

The stumbling block for the former board was the reliance on past spending to determine future needs. Because they don't think Earlham spent as much as it could-or should-have, they feared the museum would continue to be shortchanged. Before they were dismissed, the old board had asked for a $100 million endowment.

"We felt there were substantial unmet needs in the way Earlham was running the museum," Duck said. "Salaries were too low, the advertising budget was too low, the maintenance and repair budget was way too low. We were concerned that the history did not fully reflect the costs of running the museum."

Eventually, though, they conceded the point that outside contributions also were low, and likely will increase if and when Conner Prairie is on its own.

"It seems to us that this is in the best interests of both parties," Duck said.

Carter timed his announcement to coincide with the Earlham board's next meeting Feb. 4-5.

"I thought the public should be aware of what's happening before the final decision," he said.

But he may be overly optimistic about that timetable. Although Earlham's statement indicated the proposal will be discussed at the board meeting, a resolution then seems unlikely.

"Despite our disappointment with the attorney general's recent announcement, we are considering all aspects of the proposal," the statement read. "We hope the attorney general is committed, as we are, to continuing negotiations until we reach a mutually satisfactory agreement."

In addition to the endowment and property split, Carter's settlement proposal calls for Earlham to file an accounting with the court and drop its appeals. If the college doesn't agree, all bets are off.

"We're going to continue to do whatever we need to do," the attorney general told IBJ. "I'm hopeful full revelation ... and division of assets will address all the potential issues."

And if not?

"I wanted to have thorough discussions, to be very deliberative. That process is complete," Carter said. "If we can't resolve it this way, we'll have to look at other means to do that. I don't think that's in Earlham's best interests."
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