TOWER- At a joint meeting between the city of Tower and the Gundersen Trust Board, the group heard from two community foundations interested in taking over management of the trust fund through conversion to a community foundation model.
The group also heard that the option of continuing to independently manage the trust through Frandsen Bank and Trust was off the table. The trust board needs to make a decision on the future management of the trust, and any decision that is made will require court approval.
Steve Vranich, Sr. Vice President and Trust Officer at Frandsen, was not able to attend the meeting due to a family emergency, but he wrote to Gundersen Treasurer Steve Wilson detailing his recommendations for the trust board.
“I must say that after reading the letter from the Quinlivan and Hughes Law Firm, and the options they outline, it may be best to partner with a community foundation,” he wrote.
Frandsen would still be interested in partnering with a community trust to manage investment of the assets, he said.
Some members of the trust board have indicated they would prefer to keep control over the trust and work with a local bank. This option would still require the trust to seek court approval, and also would require an annual audit and other attorney fees, costs which are currently adding up to more than what the trust earns in interest in a year.
Vranich said he had spoken with Karl Samp at the Brainerd Lakes Area Foundation.
“They would hire us to manage the assets of your portfolio,” he said. “They have the expertise on assisting the city of Tower to build and maintain the foundation and we have the expertise on investing the funds. They do not invest foundation monies but hire third-party investors to do so, which is what our role would be.”
The July 14 letter he was referencing was work from the Quinlivan and Hughes Law Firm, hired by the trust board, that outlined three options for the board to consider for the future of the assets of the trust.
The current legal and tax status of the trust, which now totals over $900,000, has been the focus of the trust board this past year as they work to create a new framework that would allow for the trust to earn more income. The purpose of the trust was to create income to contribute to the city and its residents, in perpetuity.
The attorney’s review of the trust brought into focus questions about how the trust is currently being operated as a “government trust,” and the fact the trust had never applied for 501(c)3 non-profit status.
“There is still uncertainty as to the exact legal status of the Gundersen Trust,” attorney Brad Hanson wrote to the trust board.
In addition, investment restrictions placed on the trust’s assets in a 2018 court order meant the investment options for the money were severely limited to options that currently, and expected in the near future, are earning almost negligible amounts of interest income.
Even before the presentation by two community foundation representatives, some trust board members had reservations about moving the funds to a community foundation.
“Once you sign it away, it is gone,” said trust board member Dena Suihkonen. “I don’t think the Gundersen family gave it to us for something future generations can’t decide on. You are taking away future generations’ rights to possibly come up with a better way.”
“It is very clear in the historical record that this was something given for the perpetual benefit of the city,” said Wilson. “It was clear that when they set up the initial court order, they wanted a permanent endowment.”
Switching the money to a community foundation model does not change this, Wilson noted, and the authority for spending the proceeds would still be at the local level, not decided by the community foundation.
But others noted that the local group does not have the expertise to be managing this fund on its own.
“We can’t match the investment brains that do this seven days a week,” said trust board member and city council member Sheldon Majerle. “And if it isn’t in a foundation, we need to deal with the IRS and auditors.”
Trust board chair Jesse Gornick said the board might have to look into hiring someone as their board treasurer if they choose to continue managing the fund themselves, another expense, and this also wouldn’t guarantee a long-term outlook for the investments.
A community foundation approach can create a stable source of investment profits, guaranteeing a specific return on the funds invested, mostly between four and five percent. Any income earned in a year above that amount gets reinvested in the principal and helps create a cushion for years when the market is poor.
At the joint meeting, the council and board heard from representatives from two Minnesota-based community trusts, Duluth-Superior Area Community Foundation and Brainerd Lakes Area Foundation.
Community trusts are non-profits set up to professionally manage investments that then pay out a stable income to the beneficiary, year after year.
The city would need to terminate the trust and then transfer the funds to the community foundation, which would carry out the purpose of the trust. This option also removes the need for an annual audit and other attorney fees.
Community foundations have guidelines for how they invest their clients’ money.
“Investments are governed by statute,” said Duluth Superior Foundation Development Officer Mark Danielson, who attended the meeting in Tower.
Danielson said their current investment mix is about 70 percent in stocks and 30 percent in bonds. Their stock investments are all in index funds which reflect broad swaths of the stock market and have low investment-related costs.
“We have a pretty straightforward investment philosophy,” he said.
The foundation manages over $100 million in assets and a total of about 450 individual funds.
The foundation would charge a 0.55-percent fee annually on the total amount in the fund. They also are hiring a new investment manager, and that charge will total 0.1 percent.
“We are solid with sound investment management,” Danielson said. “We are based in northeastern Minnesota, we understand our communities.”
Steve Joul, President/CEO, and Karl Samp, Executive Director, from the Brainerd Lakes Community Foundation gave their presentation via Zoom. Their foundation started with about $18.5 million in assets but now manages over $200 million in assets in over 850 funds, most based in central Minnesota.
They also have a focus on helping communities grow their funds by soliciting new donations and bequests.
Costs for this fund would be 1.0 percent for an endowed fund and 1.25 percent on a flex fund, plus an investment fee that ranges from 0.24 percent to 0.57 percent, or the option of using Frandsen at 0.6 percent.
Both funds would then distribute the proceeds to the city, which would need to set up a board, like the current Gundersen Trust board, to oversee distribution of the income each year. The distribution would need to fit charitable guidelines. Currently, the Gundersen Trust is set up to distribute 75 percent of its annual income to the city’s general fund, and 25 percent to community education and recreation for city residents. The actual terms of the distribution would be set by the future court order dismantling the current trust and selection of a community foundation.
The board made no decisions on selecting an option at this meeting. A motion by Wilson to eliminate the consideration of Option1 (continuing to locally manage the fund) failed on a 3-3 vote, with board members John Burgess, Dena Suihkonen, and Sheldon Majerle voting against.
“Frandsen is saying thanks but no thanks,” said Tower Council Member Joe Morin. But council members did not decide to weigh in with a vote at this meeting.
“I don’t believe that Frandsen doesn’t want our business,” said Burgess. “Let’s hear from Frandsen. That would solve my situation. I am only one vote.”
Wilson noted the board already had Frandsen’s answer in writing.
The board decided to have a second meeting in December to hear from the St. Paul Foundation, and also to see if Steve Vranich from Frandsen was willing to attend the meeting (in person or via Zoom) to answer questions. The meeting date will be set sometime in the second or third week of December.
In other business, the trust board decided not to automatically renew a group of five CDs at Frandsen Bank, which are currently earning .07 percent or less. The board is also looking into hiring a new audit firm.