The $1.5-Billion Challenge

Landmark bequest may change thrift-conscious Salvation Army

As the Salvation Army prepares to receive the bulk of the $1.5-billion left by the McDonald’s heiress Joan B. Kroc,

many of the charity’s officials are hoping that the money could lead to a rebirth of sorts for the 137-year-old nonprofit organization. The charity raises more money from private sources than any other organization, but it has struggled to persuade young people, baby boomers, and the very wealthy to be as loyal or as generous as the Depression-era Americans who continue to pour small gifts into the charity’s famous red kettles.

But some of the organization’s leaders, as well as outside observers, fear that as the charity tries to meet Mrs. Kroc’s demands, it could lose many of the very qualities that have made the Salvation Army one of the most widely respected nonprofit organizations.

Mrs. Kroc stipulated that half of the bequest must go toward the construction of 30 to 50 recreational, arts, and educational facilities in needy neighborhoods across the country. She wanted the new centers to be modeled on the Ray and Joan Kroc Corps Community Center, a gleaming facility that opened here two years ago after Mrs. Kroc provided $94-million in capital and endowment support to help create it.

The other half of Mrs. Kroc’s $1.5-billion gift must be put into an endowment whose earnings would pay for an estimated 50 percent of the operating costs of the new facilities — which means the charity will have to raise an additional $60-million to $70-million a year to pay for the remaining needs of the centers.

Learning From Mistakes

The Salvation Army, an international Christian organization, already operates 9,000 social-service centers around the country and is well respected for its efforts to provide shelter to the homeless and to help rehabilitate drug abusers.

But as the group has learned here in San Diego, a Kroc center can represent big challenges that the organization is unaccustomed to handling. At the San Diego center, Salvation Army leaders didn’t hire a dedicated fund raiser or develop a business plan for the facility until a year after opening it. They underestimated the cost of running the center by $2-million a year, made several construction and planning mistakes that have limited the revenue the facility produces, and charge members only a fraction of what it actually costs to provide them with services. Those and other mistakes have caused the center to accumulate a deficit of $250,000 in each of the two years it has been operating.

Some people in and out of the organization worry that the troubles the San Diego center has faced could play out nationwide. Traditionally, the Salvation Army has prided itself on its thriftiness — it says almost 90 percent of its budget goes to charitable programs — and its aversion to aggressive fund-raising tactics. But if the group is going to raise enough money to successfully operate the centers Mrs. Kroc wanted built, then it will need to scrap some of the thrifty habits that have endeared it to poor and middle-class donors. It also must reach out to wealthy people and corporations and embrace some of the approaches that other charities use to win support.

Spending more resources to woo major donors could help attract far more support for the organization in the future, but some critics say the practice could alienate those who give to the group because they like its dowdy image, penny-pinching ways, and commitment to serving the needy.

“It would be a real mistake for the army to get too heavily committed with major donors because so many corporations and wealthy people want something in return for their support,” says Ben Brown, co-author of the book The Most Effective Organization in the U.S.: Leadership Secrets of the Salvation Army. “If they start to sell little pieces of the Salvation Army in exchange for millions of dollars, they’ll do themselves in.”

Raising Money

Some Salvation Army officials think the organization should not only cultivate wealthy donors, but also seek more money from corporations and foundations to build the new facilities. Others are also encouraging the charity to work more closely with governments to support the new centers. Representatives from 34 local governments across the country already have visited the San Diego facility, hoping to land one of their own.

The organization, whose fund raising is entirely decentralized, must also decide how closely local units will work together to raise money for the centers.

Commissioner W. Todd Bassett, the group’s top executive, wants to create a fund-raising unit in the national office in Alexandria, Va., to attract support for each Kroc center. While the organization’s national staff has developed some corporate licensing and marketing deals in the past, it has never sought to raise money out of concern that it would be competing with local Salvation Army units.

Top Salvation Army officials from around the country plan to meet at the Kroc Center this week, in part to discuss how they will proceed. Whatever the organization decides, Commissioner Bassett says it must move quickly to start raising money to support the new centers, many of which could open within the next four years.

“Our job right now is to make an organization that hasn’t had to move fast historically do so,” Mr. Bassett says. “It’s a challenge, but we’re cognizant of it, so we think we can handle it.”

How Many Centers?

Just how much the Salvation Army intends to change its traditional ways to support centers in other cities across the country remains to be seen.

Top leaders in the organization’s four regional headquarters, who oversee their operations independent of the national office and will each receive a $375-million share of the Kroc gift, say that the group’s strength is raising and distributing money locally and they don’t want to alter that approach. Representatives from two of the four regional headquarters also say that in part because of the difficulties the San Diego facility has experienced — but also because of the flexibility Mrs. Kroc gave the organization to design facilities of various sizes — they are considering using the Kroc money to build far smaller centers than the existing one.

“We don’t really want to build a few $50-million facilities that are so difficult to operate and where everybody else loses out on getting one,” says Maj. Gary W. Miller, the community-relations and development secretary for the charity’s eastern territory, which covers 11 states stretching from Maine to Ohio. He expects his territory will probably add about 12 centers, but leaders there have not decided how many facilities to build or how much they will cost to construct.

Representatives from the southern territory, which includes 14 states and the District of Columbia, say they hope to build about 30 Kroc centers rather than five or six major facilities that would be difficult to operate, says Maj. John R. Jones, the outgoing territorial community relations and development secretary. Southern leaders also are considering expanding community centers instead of creating new facilities.

“I would prefer seeing a number of centers where the money can be spread out more and still meet the wishes of the donor,” Mr. Jones says.

The possible move by some parts of the organization to build smaller Kroc centers has stirred debate in the Salvation Army, as those who knew Mrs. Kroc say she would not want to see smaller, ordinary buildings.

“Mrs. Kroc always told us to dream big. She wanted the center to be a beacon of hope and an agent of change in an underserved community,” says Col. Donald Bell, who worked closely with Mrs. Kroc on designing the San Diego Kroc Center. “In a small city, a Kroc center might cost significantly less to build, but it would have to be a significant addition onto an existing center to really work for what Mrs. Kroc wanted.”

Large Donations Sought

Regardless of how the regions decide to spend their money, it is clear they are going to have to raise significant funds to match Mrs. Kroc’s gift while still maintaining their regular programs.

That will mean more responsibility for the group’s 3,500 officers, who already shoulder many duties. They are all ordained ministers and spend much of their time preaching the gospel, but they also act as part-time business managers and fund raisers.

In addition to its officers, the organization estimates that it employs between 700 and 1,200 fund raisers who work at chapters nationwide. Compared with other charities, the group’s professional fund-raising staff is “very thin,” says Chip Grizzard, a direct-marketing consultant in Atlanta who works with the Salvation Army and other charities.

One thing that could hamper fund-raising efforts for the new centers, say some in the organization, is the Salvation Army’s inexperience in approaching major donors. The organization didn’t set up a formal, nationwide program to acknowledge big donors — called the William Booth Society — until 1996. The society honors people who give at least $5,000 or more a year for operating support. Because the organization raises money locally, it doesn’t keep track of how much the major-donor program has grown across the country.

Commissioner Bassett says the charity’s efforts in attracting large donations “have not taken off as quickly as I would have liked.” Still, he says, “It’s going to have to be where we’re headed — especially with the Kroc gift.”

‘Nearly Every Toy’

It was Mrs. Kroc who in 1998 approached the Salvation Army — not the charity that sought her out — to finance the first center. No one imagined that the wealthy widow of Ray Kroc, who made a fortune in fast food, was watching closely to see if the organization could handle a far larger bequest.

The organization impressed Mrs. Kroc by moving quickly — it took just four years from the announcement of the gift to the dedication of the center — and acting prudently in building the first center, says Dick Starmann, the executor of her estate.

It purchased an abandoned 12.5-acre shopping center for $4.5-million near neighborhoods where half the households earn less than $50,000 a year. Several Salvation Army officers toured large YMCA’s around the country to get ideas, and then visited dozens of local recreation centers to evaluate the local community’s needs.

More than 300 people, many of whom ran similar facilities in San Diego, agreed to join committees to offer advice on staffing, safety, and other issues. Committee members also contributed design ideas for what would become a 295,000-square-foot structure that stretches two city blocks.

Mrs. Kroc cut no corners in creating her hometown jewel. She gained confidence ice skating as a child, and wanted to build a skating rink where kids who never got the chance to skate could learn. She insisted on installing a hardwood basketball floor with the same specifications used in the National Basketball Association. And the stage in the 600-seat auditorium, where Mrs. Kroc herself later played piano behind the musician Tony Bennett during a performance, features more fly space than some Broadway stages do.

“We have nearly every toy here known to man,” brags Maj. Cindy Foley, the Salvation Army officer who oversees the facility, which also includes an Olympic-size swimming pool, a rock-climbing wall, a skateboarding gymnasium, corporate meeting rooms, a day-care center, and a $2.5-million Henry Moore sculpture.

But the size and scope of the Kroc Center, and the Salvation Army’s inexperience in running such a facility, have led to problems. The center’s operating deficit came about in part because the group thought that annual interest payments from the $40-million endowment Mrs. Kroc provided would cover half of its expenses. Instead, because of stock-market losses the endowment incurred in 2000, the Kroc money only takes care of one-third of annual expenditures.

The charity also underestimated the cost of running the facility. It requires about $6-million annually — $2-million more than the Salvation Army expected. One of the biggest expenses comes from usage, another area where the organization missed initial projections. Officials of the Kroc Center expected to have 1,500 members after the first year and 3,000 after the second year. As it has turned out, they had 3,000 members after six weeks and have plateaued around 6,500.

The cost of serving those members and the many others who use the facility, including corporate groups, has strained Major Foley’s budget. Individuals pay an average of just $120 a year for a membership — far less than memberships and initiation fees at competing fitness centers — but it costs the Salvation Army five times that amount to pay for services for each member. In addition, several hundred needy children and adults receive free memberships. The organization partially offsets the cost of those by raising money for a scholarship fund that it started a year after opening.

Poor planning at the outset — and changes that city-permit officials forced the Salvation Army to make to the design of the center — have led to key problems. Concessions, a major income producer for many facilities, were “an afterthought,” Major Foley says, and haven’t generated much money. Because of scarce spectator seating, the ice arena cannot host tournaments or competitions, limiting the revenue it can produce. A half-dozen entrances to the facility make it difficult to track who enters the center — or if people use it without paying.

And according to a recent study of members, more than 80 percent use the facility primarily for the fitness area, which has about 25 exercise machines and a room of weight-lifting equipment. But the amount of equipment and space does not adequately accommodate the number of people who use the facility, according to Wil Sanders, the center’s athletic supervisor. That has caused a few people to cancel their memberships, he says. To fix the problem, Mr. Sanders says he has suggested converting a children’s game room into an additional workout space.

Marketing Coordination

The Kroc Center has two profitable activities: its summer camps and its ice-skating rink, which teams rent for practices. Camps brought in $350,000 more than they cost to run last year, while the ice arena generated $200,000 over its $1-million operating cost.

Rental income and corporate sponsorships — two areas where the Salvation Army did not initially budget much revenue — have also turned into income producers. Since the Kroc Center opened, officials have inked a dozen corporate deals worth a total of $40,000. Only Coca-Cola, which displays a sign in the ice arena, receives any advertising or other benefit for its contribution.

Commissioner Bassett thinks that the charity could attract far larger deals if the national office coordinated marketing efforts for the Kroc centers.

“I believe that when you approach major donors and corporations seeking money, they will want to give one gift — not separately to all four territories,” he says. “If we don’t make this change now, we will have to in the near future.”

Major Foley, whose background is in elementary education, says that she might have had an easier time in her position if she came into the job with more fund-raising experience. She says she sometimes feels overwhelmed by the facility, and occasionally has felt “sheer terror” that the center might never break even.

She says she comforts herself in knowing that Mrs. Kroc would rather see her scrambling to raise money than sitting back and waiting for the endowment payments to arrive.

“Mrs. Kroc knew that if she paid our way entirely, there would be no need for the community to support the center,” says Major Foley. “It’s no accident that running this place is no cakewalk.”