Milton Hershey School says its founding deed prevents it from spending more money on its core mission
- By Bob Fernandez/The Inquirer and Charlotte Keith/Spotlight PA
May 28, 2021 | 5:00 AM
This Spotlight PA article was produced in partnership with ProPublica and The Philadelphia Inquirer, which is a member of the ProPublica Local Reporting Network. Sign up for Spotlight PA’s free newsletters.
(Hershey) — Long ago, and to great fanfare, business tycoon Milton Hershey revealed that he had given away his world-famous chocolate company, a gift to the school for poor orphans that he had founded with his wife.
“Well, I have no children — that is, no heirs,” he said in 1923. “So I decided to make the orphan boys of the United States my heirs.”
Hershey died in 1945, leaving a huge estate and a company that would grow to sell more than 250 million candy bars a year. His generosity, however, has created a dilemma for the Milton Hershey School that many charities would envy: too much money.
Over the years, board members who control Hershey’s estate invested in land, stocks, and bonds. They helped transform Hershey’s company town into a tourist destination, complete with hotels, amusement-park rides, golf courses, and a conference center — all now part of the school’s endowment, which includes a controlling stake in the chocolate company.
Federal tax law does not mandate that organizations like the Milton Hershey School spend a particular amount each year on their charitable mission. But the widening chasm between what the school could spend to help poor children and what it actually spends has led alumni, a local probate judge, and the state attorney general to call for the institution to do more.
Hershey’s fortune, which funds the school, has ballooned to be larger than that of the Ford Foundation. But the school has faced persistent criticism for helping only a fraction of the vulnerable children it could reach with its vast wealth. New questions have arisen over its spending after a former board chair sued in early April for access to financial documents he says he’s been denied for more than a year.
Located on a sprawling, leafy campus abutting farmland in Hershey, Pennsylvania, the nation’s wealthiest school serves roughly 2,100 students from low-income families. Founded as an orphanage where boys earned their keep working on Hershey’s dairy farms, the school now boasts rigorous academics and extensive support services, and most of its students go on to college.
Dan Gleiter / PennLive.com
In 1999, enrollment at the school was roughly the same as it had been in the 1950s. Between 1999 and 2019, the number of students doubled. But over the same period, the school’s endowment increased nearly fourfold and is now worth more than $17 billion.
John Kinnaird, a 1949 graduate of the school who spent time with Milton Hershey over dinners as a student, said the businessman would have wanted his charity to spend more. “His heart was to provide for orphans,” he said.
The charity’s board members say they are doing what Hershey wanted. Beginning in 1909, Milton Hershey put his estate into the Milton Hershey School Trust, the legal entity that exists solely to hold the Hershey estate and to fund the school. Board members say they are bound by the school’s founding document, the original deed signed by Hershey and his wife, Catherine. To ensure that the school will exist “in perpetuity,” the deed says the board can spend only the income earned by the endowment, not the endowment itself. So while the school’s total assets are worth $17.4 billion, $16 billion of that — Hershey Co. stock, real estate holdings and other investments — cannot be spent, according to the deed.
Even with that constraint, however, the school hasn’t been as generous as it could be.
The Inquirer, Spotlight PA, and ProPublica have spent the past year examining the Hershey Trust and Milton Hershey School — their structure, their spending, and the education the school provides. The news organizations found that in most years since its founding, the Hershey fortune has generated more income than the school has spent. As early as 1934, Fortune magazine noted the “embarrassingly large surplus piling up in the school’s coffers.” By 2020, the unspent income had grown to more than $1 billion, even as the school spends roughly $90,000 per student a year.
The Hersheys gave the school’s board of directors the power to admit more students as more income poured in. (As the deed put it: “From time to time, as there may be vacancies, or increased ability from income may warrant, others shall be admitted.”)
But, crucially, they left the specifics of how many students to admit, and how much income would warrant an expansion, up to the board members. Still, in a 1999 ruling, a state judge wrote that the Hersheys’ intentions were clear: “to care for as many children at the School as the income will permit.”
Administrators say the school plans to grow to 2,300 students over the next few years. And last September, under pressure from the state attorney general to spend some of the money that has piled up, the charity announced that it would use $350 million to create a network of six preschools across Pennsylvania, calling the project perhaps the “largest private commitment of its kind to early childhood education.”
Twice in the past decade, the charity, whose board members are paid at least $110,000 a year, has been investigated by the state attorney general, who was looking into whether its spending was sufficiently helping kids; both times, the charity reached settlement agreements ending the probes and leading to reforms.
In early April, former board chair Robert Heist sued for access to financial records that he said school officials had withheld for more than a year. Heist, who still sits on the board, said he needed the documents to ensure that school funds were not wasted. The school claims in court documents that Heist’s requests “represent a fishing expedition”; the suit is ongoing. Heist said in a court filing on Monday that he seeks the documents to “better understand how millions of dollars could not be budgeted or accounted for annually while relating to ‘school operations.’”
As a charity, the Milton Hershey School doesn’t pay federal or state income taxes. In exchange for those big savings, the school is expected to serve the public good through its stated purpose: housing and educating low-income and at-risk children.
“The tax breaks are intended to support efforts in the public good and it’s not for the accumulation of wealth, particularly at this historic moment when the needs are so great,” said Mae Quinn, a professor at the University of the District of Columbia’s law school who has written about wealth accumulation at elite private colleges.
“We are constantly growing our program and seeking ways to support more children from poverty and do it better everyday,” Milton Hershey school spokesperson Lisa Scullin said in a statement. “The deed also requires the school to be funded forever,” she said, adding that “prudent management is what ensures that will happen.”
Hershey board members say that, when it comes to spending more, their hands are tied by the restrictions in the original deed, particularly the requirement that they spend only the income from Milton Hershey’s fortune — rents, interest, and stock dividends — not the estate itself.
But the deed’s restrictions can be, and have been, loosened. Since the school’s founding, and even during Milton Hershey’s lifetime, board members have eliminated or rewritten parts of the deed.
For instance, the deed originally said that income from the school’s endowment could only be spent on the school itself. But in 1963, board members decided there was too much unspent income and sought to divert $50 million to build a hospital on land owned by the estate and used by the school. A change like this requires a legal process known as cy-pres, where a trust asks the county probate court for permission to alter the terms of its deed while sticking as closely as possible to its founders’ intentions.
The court approved, and construction began on the hospital. Some older alumni of the school are still bitter about that decision, believing it was improper, since Hershey intended his gift to fund only the school for orphans, not other interests.
In 1970, the charity again sought and received court approval to change the terms of the deed, this time lifting its requirement that admission to the school be limited to “white male orphans.” Several years later, the deed was changed once more to let girls in, as well as children from disadvantaged backgrounds, not just orphans.
And, in yet another change, the charity won court approval last year for its plan to build and run the six preschool centers across the state, breaking for the first time with the deed’s insistence that the school must be “permanently located” in Derry Township, Pennsylvania, which includes the town of Hershey.
The move came after prodding from Pennsylvania Attorney General Josh Shapiro, who said in court that addressing the school’s “significant accumulated income” was at the top of his agenda when he took office in 2017.
The preschool project, which will take five years to complete, represents a major expansion for the charity — the first time in its 112-year history it will serve poor children without requiring them to live in the Hershey area and the first time it will reach children under the age of four. When they’re up and running, the preschools will cost roughly $55 million a year to operate.
Even so, the initial $350 million phase of the project will use up only a fraction of the $1.2 billion in unspent income that has already accumulated.
And as part of the preschool initiative, in a move that was approved by the court, the charity will designate almost $900 million as emergency reserves — enough to cover 2.7 years of operating expenses for the Milton Hershey School. Experts say nonprofits typically only keep about a year of expenses in reserve.
By reclassifying the roughly $900 million as a rainy day fund, the charity made it unavailable for a broader expansion.
Laura Otten, the executive director of The Nonprofit Center at La Salle University, said nonprofits’ reserves typically hold three months to one year of operating costs. “Some say the max should never be more than two years. I’ve yet to meet a nonprofit that has two years’ worth of reserves,” she said.
But Scullin, the school spokesperson, said, “Given that the school has a single source of revenue that must exist in perpetuity, it is both common practice and prudent policy to establish a reserve policy.”
A new law allows for more spending
When the Milton Hershey School was founded, in the early 20th century, it was common for trusts and foundations to limit their charitable spending to the traditional income generated by their endowments.
Milton Hershey School
Beginning in the 1970s, though, leaders of college endowments and nonprofits sought looser rules and more investing flexibility.
To free up these charitable resources, Pennsylvania lawmakers passed a law in 1998 that allows nonprofits and charitable trusts to spend more each year by adopting a broader definition of “income.” Under the new law, charities and nonprofits could choose to spend anywhere from 2% to 7% of the entire market value of their assets, averaged over at least three years. Board members could simply vote to change their policy and keep “permanent records” of the decision. Court approval was not required.
A year later, in 1999, the Hershey charity appeared poised to take advantage of the new law. Robert Vowler, then a charity board member and president of the Hershey Trust Co. that administers the Hershey estate, testified in court that board members had chosen an annual spending rate of 3% of the school’s assets. “The legislation is very good,” he said. “It allows us to view the whole portfolio.”
But the board did not adopt the policy. If it had, the school could be spending much more — an extra $166 million in 2019 alone. Vowler did not return calls seeking comment.
The news organizations’ analysis of 20 years of tax documents found that the charity spends, on average, 2.2% of its total wealth each year to run the school. By contrast, endowments, foundations and nonprofits — which aren’t limited to spending only their traditional income — typically spend between 4% and 5% of their assets each year, studies show.
Using the 1998 law, other Pennsylvania charities have been able to spend a greater percentage of their assets. The legacy trusts administered by the Philadelphia Foundation, for example, spend 5% annually, based on the average value of the trust assets over five years, said Pedro Ramos, foundation president and CEO — even trusts that were originally limited to spending only their income.
Shapiro, the state attorney general, said through a spokesperson that it’s up to the Hershey charity to decide whether to take advantage of the 1998 law, called Act 141. At the same time, the attorney general’s office said that there is no reason the charity could not change its policy under the law, and that it continues “to push for the trust to invest more resources in Pennsylvania children.”
Milton Hershey School
At 99 years old, Ken Brady is one of the oldest surviving graduates of the Hershey Industrial School, as the school was originally known. He and his two brothers enrolled in December 1929, after their father died. Brady got to know Milton Hershey over dinner at one of the school’s farm homes and while doing chores in the barn. When Brady graduated in June 1940, Hershey personally handed him his diploma.
Brady says he’s grateful the school rescued him and gave him a future — that’s why he’s disturbed by its reluctance to take full advantage of Hershey’s gift.
“Mr. Hershey took care of me,” he said. “I feel an obligation that other children should have the same opportunity that I had.”
He believes Hershey would have wanted the school to serve as many children as possible. “Seventeen billion dollars? You should have thousands and thousands of kids.”