Freedom Curtailed

Investment losses and spending policies prompt major cuts in journalism programs and staffing at Freedom Forum

The slide in the stock market since the spring of 2000 has had devastating effects on the portfolios

of many nonprofit organizations. And for the Freedom Forum, one of the nation’s biggest operating foundations, investment losses — coupled with a $100-million real-estate purchase for a piece of land estimated to be worth no more than $60-million — have prompted some of the most serious cutbacks in staff and programs among nonprofit groups.

The Freedom Forum, an Arlington, Va., organization that promotes journalism, has seen its endowment shrink from $1.1-billion at the end of 1999 to about $700-million — a loss of more than one-third of its net assets in less than two years. That drop occurred in part because of investment losses, but also due to the group’s decision to spend about 8 percent of its assets in each of the past five years.

Facing a $20-million deficit this fiscal year, the Freedom Forum announced in October that it would eliminate 110 positions from its 280-person staff, including five vice presidents (out of 15), and close five of the seven offices it operated outside Virginia.

The changes mean that the foundation has gotten out of the business of training journalists here and abroad. The organization will spend most of its energy on moving its Newseum, a museum that focuses on the news media, from Virginia to downtown Washington, as well as on programs to increase the number of minorities working on American newspapers and to promote First Amendment issues.

The financial crisis at the Freedom Forum shows what can happen when an organization’s financial management does not mesh with its ambitious plans to expand its programs. The Freedom Forum’s spending decisions have come into question before: In 1995, it reached a settlement with the New York attorney general’s office under which trustees agreed to pay back $174,000 for money spent on travel, handmade furniture, and other expenses. The foundation also agreed to establish controls to ensure that charitable funds were not misappropriated.

Today, the Freedom Forum is facing a different set of challenges.

The foundation, which was established in 1935 by the media magnate Frank Gannett and turned into an operating foundation in 1991, saw its investment portfolio drop 19 percent in value since January 2000, and the portfolio’s performance over the three previous years was far weaker than at other foundations during the stock-market boom of the 1990s. Among the nation’s five largest operating foundations, only the J. Paul Getty Trust, in Los Angeles, saw its endowment grow less than the Freedom Forum’s from 1996 through 1999 (22 percent, compared with 25 percent for the forum). Two other foundations that focus on journalism issues grew at a far faster pace: The net assets of the John S. and James L. Knight Foundation, in Miami, more than doubled over that period, while the endowment of the Scripps-Howard Foundation, in Cincinnati, grew 80 percent.

‘Plain Vanilla Investors’

The drop in the Freedom Forum’s endowment, 75 percent of which is invested in the stock market, is considerably larger than those being reported by many other nonprofit organizations with sizable endowments, according to preliminary results of a study by the Commonfund Group, a Wilton, Conn., organization that manages investments for nonprofit groups. Of 75 nonprofit organizations sampled by Commonfund, the average loss was 2.8 percent from net assets in the 12 months ending June 30.

John Griswold, a senior vice president at Commonfund, said a loss of more than 30 percent of an organization’s net assets over the past two years would be among the largest suffered by any group.

“In general, if you’re diversified properly in your investments, you should not have seen a 30-percent drop,” Mr. Griswold said.

Even as the market boomed in the 1990s, however, the Freedom Forum’s investments generated less profit than some of the standard stock indexes. From 1994 through 1999, the value of the foundation’s stock portfolio increased about 140 percent. But during the same period, the Standard and Poor’s 500 rose 215 percent, and the Nasdaq gained 430 percent.

“We are plain-vanilla investors,” said Charles L. Overby, the Freedom Forum’s chief executive, explaining that the forum did not want to invest too heavily in volatile technology and other growth stocks, which he said have never made up more than 20 percent of its investments.

Spending Patterns

While the investment losses have played a part in the Freedom Forum’s problems, the group’s spending policies are also responsible for the decline. The decision to spend about 8 percent of its net assets annually is unusual. That rate is exceeded by just two other of the nation’s 20 operating foundations with at least $200-million in net assets: the Open Society Institute, in New York, and the Henry J. Kaiser Family Foundation, in Menlo Park, Calif. The Open Society Institute is unusual, however. Its founder, the billionaire financier George Soros, provides it with a yearly payment, all of which it is expected to spend.

Spending 8 percent of assets annually is an “unsustainable” pace, said Samuel Hayes, a Harvard Business School professor and an expert on financial management of nonprofit organizations who chairs the investment committee at Swarthmore College, in Pennsylvania. Eating into a group’s endowment at that pace, Mr. Hayes said, would eventually exhaust its assets and force it to stop operating.

The Freedom Forum’s Mr. Overby disputed that assessment. Under normal economic conditions, he said, the earnings the foundation receives from its investments are more than adequate to cover its spending, but the past two years have been atypical. “The country hasn’t had two back-to-back years of losses in the stock market in 25 years, and there were only four in the 20th century,” he said.

Exacerbating the foundation’s budget troubles: It paid $100-million last year to the city of Washington to purchase property on Pennsylvania Avenue between the White House and the Capitol, where it plans to relocate its offices and the Newseum. Real-estate appraisers and developers in Washington have estimated the value of the property at $40-million to $60-million. Foundation executives acknowledged that their price is at least $30-million more than any other developer was expected to bid for the site. But they added that they needed to give the city an offer that would produce a quick agreement, because the lease for the current Newseum site runs out in 2003.

Freedom Forum officials said they consider the investment worthwhile because the new site is expected to attract at least double the 500,000 visitors the Newseum draws annually.

The new location, across Pennsylvania Avenue from the National Gallery of Art and near museums that are part of the Smithsonian Institution, “is one of the best museum sites in the world,” added Peter S. Prichard, the forum’s president. “You can’t go to the Louvre and buy a site next to it. You don’t get many chances to locate between the White House and the Capitol next to the museum center of the United States.”

The financial shortfall caused by that expenditure and the investment drops prompted the foundation to close its international journalism program offices in Buenos Aires, Hong Kong, Johannesburg, and London, from which it ran seminars and other training programs for hundreds of reporters and editors.

The forum also shut down its First Amendment Center in New York. (The main First Amendment Center is located at Vanderbilt University, in Nashville.) Forum executives said those cuts will save $10-million annually. In addition to the remaining Virginia and Nashville offices, the operating foundation retains rent-free use of an office in Cocoa Beach, Fla., in a building owned by its founder, Allen H. Neuharth.

The Freedom Forum also is eliminating 40 percent of its staff and offering buyouts to many top staff members or encouraging them to take early retirement. It estimates that the savings from the staff cuts will cover the rest of the budget shortfall.

Employees who accepted the buyouts had to sign confidentiality agreements, pledging not to publicly criticize the forum.

A half-dozen Freedom Forum staff members contacted by The Chronicle declined to comment because of those agreements, although most added that they had nothing critical to say about the foundation anyway. Some of them, however, questioned the propriety of an organization whose mission is to promote freedom of speech and the press requiring its own employees not to speak publicly, as did some media critics.

“Why is a freedom-of-expression foundation interfering with the free expression of its former employees?” said Ben Bagdikian, a media critic and former dean of the University of California at Berkeley’s journalism school. Requiring employees to sign such agreements, he added, “is reprehensible.”

Mr. Overby stands by the policy. “This is standard language taken directly from similar buyout agreements used by other media companies,” he said.

Programs Closed Last Year

This year’s round of cuts comes just a year after the forum significantly reduced its spending on journalism education.

It closed its New York Media Studies Center, which supported academic research into journalism issues, closed a San Francisco office from which it ran various journalism-training programs, and eliminated a respected program that paid full tuition and fees for experienced journalists who wanted to earn doctorates from the University of North Carolina School of Journalism and Mass Communication in order to become journalism professors.

Foundation executives said it was painful to eliminate such effective programs, but added they had no choice given the financial losses.

The priorities the forum board chose to focus on — the Newseum, the First Amendment, and diversity in the newsroom — were more important, they added.

But some former and current employees of the Freedom Forum question other expenses paid out by the foundation in recent years. The forum spent $3-million on a joint venture with WETA, one of Washington’s public-television stations, to put together a cable public-affairs network that was abandoned after six months when local cable companies refused to provide it with a free channel. A forum-financed biography of Mr. Neuharth was shelved amid published reports that its author, the former NBC News president Michael Gartner, wanted to include embarrassing details about Mr. Neuharth’s personal life.

Despite shutting down most of its journalism-education programs, the forum gave a $5-million grant to the University of Mississippi in August to pay for a new journalism center named for Mr. Overby, who is an alumnus. That grant was announced the same day Mr. Overby issued a memo to the Freedom Forum’s employees announcing that major cutbacks would be necessary, and that some of them would lose their jobs.

Mr. Overby and several forum board members described the cable-TV effort as a worthwhile experiment that failed. He added that the forum spent very little on Mr. Neuharth’s biography. Regarding the grant to the University of Mississippi, Mr. Overby said, “The board did that. That was not a grant that I sought, and I didn’t seek the timing on it either.”

He added that Freedom Forum executives and board members regretted being forced to cut the international and other programs, which he thinks were quite effective in promoting the foundation’s overall goal of promoting a free press. The international program might be reinstated if the foundation’s financial condition permits.

“The hardest thing about foundation work is having to choose among good, better, and best,” Mr. Overby said. “If it were simply a matter of choosing between good and bad, it would be easy.”

PERCENTAGE OF ENDOWMENTS SPENT AT OPERATING FUNDS: A SAMPLING