The Foundation Speaks

On March 23, the Baptist Foundation of Arizona hand-delivered a letter to New Times in response to written questions. The letter, signed by Chairman of the Board Berry Norwood and BFA President William Crotts, included an introductory section, which is printed here:

This letter is the written response of the Board of Directors of the Baptist Foundation of Arizona (BFA) and its principal executives to your written questions of March 3, March 4 and March 13 which were sent to President Bill Crotts, Senior Vice President Thomas Grabinski, and Board Chairman Berry Norwood.

The Baptist Foundation of Arizona was formed in 1948 by the Arizona Southern Baptist Convention (Convention) to raise and manage endowment funds for Southern Baptist charities. These charities primarily include the churches, agencies and institutions of the Arizona Southern Baptist Convention. BFA's focus has broadened over the years, and today its Operating Mission Statement is to provide resources and expertise to Arizona Southern Baptist charities.

BFA differs from fund-raising organizations like the American Heart Association, United Way, the American Cancer Society, etc., in that these entities solicit donations from individuals, groups, and organizations. BFA does not do this. BFA, in carrying out its mission, assists its clients by providing estate planning and financial services through which they can establish an estate plan or invest in a financial product(s). Many of these clients leave part of their estate to charity.

As of December 31, 1997, more than $450 million has been designated for charity through bequests in wills and trusts established through BFA's Estate Planning Department. These gifts are referred to as "deferred charitable gifts." In 1997, $31 million in deferred gifts were left to more than 130 Southern Baptist and non-Southern Baptist charities.

As of December 31, 1997, BFA's Trust Department managed more than $84 million in trust, of which more than $28 million currently provides income to charitable causes, with the remainder benefiting heirs and charities when donors pass away.

In addition to raising resources for Christian causes, BFA directly operates charitable endeavors as follows:

1. Baptist Senior Life Ministries (BSLM). This entity owns and operates Arizona Baptist Retirement Centers, which has six campuses in three states with more than 1,200 residents. It is the largest non-profit retirement center system in Arizona.

2. Foundation Housing Corp. (FHC). FHC operates three low-income housing projects totaling 150 units and recently completed the Isaiah Project in partnership with the Church on Fillmore in Inner-city Phoenix.

Another way BFA benefits charity is through its "Ministry Investments." This represents the value placed on the time, talent, and services rendered by BFA staff to other Southern Baptist state agencies, entities, and churches. These investments, coupled with the costs to operate the charities noted above as well as BFA's Estate Planning Department, total nearly $3 million per year ($2.7 million in 1997.) All "Ministry Investments" are made at the discretion of the BFA Board.

Through its history, BFA has also provided more than $1.3 million in gifts to the Arizona Southern Baptist Convention for new church work and other endeavors.

In addition, BFA provides financing for Arizona Southern Baptist causes. In 1997, BFA loaned approximately $6 million to Grand Canyon University and about $150,000 to Arizona Baptist Children's Services.

Benefactors of the Foundation
BFA has benefited from partnerships and relationships with successful Christian business leaders who have provided intellectual and financial resources. These benefactors subscribe to BFA's goals and objectives, and have underwritten BFA's growth. The Foundation would not be here today without these people.

The benefactors' financial assistance and business acumen have positioned BFA on a well-directed path to ensure viability over the long term. Their beliefs reflect BFA's goal to be self-sustaining and continue its policy of not relying on short-term funding drives and similar strategies to accomplish its mission.

It is the policy of BFA to not divulge the names of its benefactors.

Foundation Structure
BFA carries out its work through multiple profit and not-for-profit corporations. This structure is dictated by regulatory, tax, and liability considerations. In America today, non-profit organizations commonly form for-profit companies to capture unrelated business income, which is then taxed by the IRS. This national model is followed by BFA. Each for-profit and non-profit entity complies with applicable laws and regulations.

BFA is a non-profit agency of the Arizona Southern Baptist Convention. Southern Baptists utilize a congregational form of government in which there is no hierarchy and each church is independent. However, Arizona churches, like those in most other states, cooperate to form a state convention that establishes agencies and institutions to carry out the work that cannot be accomplished by any one church. Today, the Convention consists of nearly 400 churches and missions, with more than 125,000 members.

The Convention meets annually and elects the directors and/or trustees of its various institutions. It elects BFA's 21-member Board. The Executive Director-Treasurer and the President of the Convention are ex-officio Board members. The BFA Board then elects the President of the Foundation and determines his or her compensation. The President is accountable to the Board.

BFA answers to the Convention through its board. BFA's board meets quarterly and on call as needed. Board members are elected for three-year terms, which may be repeated once. After six years of service, they must rotate off for at least one year.

Of the 21 BFA board members, 14 must be lay persons and seven must be vocational church workers. Historically, lay members are sophisticated business men and women, business owners, attorneys, CPAs, and public company executives and board members--whose experience includes risk-reward issues common to investing resources to achieve conservative but consistent returns. Typically, vocational church workers are pastors.

All subsidiary and affiliate boards are elected by the BFA Board. Boards may consist of internal staff and non-staff members of the Baptist community. All directors serve without compensation. Staff is compensated as employees, but not as directors.

In the BFA system, there are five boards with 37 outside directors to whom staff is accountable. All major decisions are made by one of these boards; investment activities of BFA are conducted by two specialized investment boards that meet monthly or as needed. Day-to-day operations are handled by staff.

Accounting and Audit
BFA's books are kept in accordance with Generally Accepted Accounting Principles (GAAP) and are audited in accordance with Generally Accepted Auditing Standards. BFA is obligated to deliver to the Convention annually its audited financial statements and budgets. The financial statements are audited by Arthur Andersen, BFA's auditor for 14 years. The auditors follow and trace all of the cash that comes in to BFA. They know where it is invested and with whom it is invested. To the extent there are related-party transactions, they are disclosed in accordance with GAAP in the notes to the financial statements.

In accordance with GAAP, all of BFA's assets are recorded on the books at the "lower of cost or market value," which ensures a conservative value for the assets listed on the financial statements of BFA's portfolio of real estate assets.

For example, Chaparral Pines, an upscale residential community in Payson, is carried on the books at approximately $12,309,000 which is its cost, but is estimated to have a present market value of about $19 million. Also, BFA owns through an affiliate approximately 23 percent of the outstanding common stock of New Century Financial Corp. (NASDAQ: NCEN). It is on the books at approximately $7,156,000. As of close of market on March 19, 1998, its per share price was $10.75, for a market value of approximately $28,900,000.

BFA has a conflict of interest policy consistent with Arizona law.
Clearly delineated personnel policies are provided to employees when they are hired and all personnel matters are held in strictest confidence.

Investment Strategy
All of BFA's financial needs must be met by a return on our investments. Although BFA has received major gifts from our benefactors, we cannot rely on this as a basis for funding our ministry. BFA does not conduct any fund drives to raise operational resources. Our investment philosophy and strategy reflect our uniqueness.

BFA invests in arenas in which our staff, and particularly our Board, has experience and expertise. Historically, we have invested significant resources in development real estate but, in recent years, have diversified into operating properties and operating companies. We invest in operating companies through a venture capital fund. New Century is an example of this type of investment. The Board is unwilling to invest large sums of money in the stock market because of the potential for extreme losses in short periods of time that could adversely affect the funding of our mission.

BFA is an opportunistic investor seeking investments that offer significant returns without inordinate risk. We search out and purchase assets that are undervalued. Likewise, as an asset-based lender, we loan on assets that are significantly undervalued. This relatively conservative approach to investing has allowed BFA to meet its investment objectives.

The mix of our investments must balance our need for current income with our goal to build the value of the assets in our portfolio. The mix is also dictated by the liquidity needs of BFA.

The Board of Directors has some final comments. We take very seriously our service on the BFA Board and our responsibility to BFA's mission and constituency. As our staff repeatedly indicated to you from the outset, we were ready and willing to answer your questions in writing. We have completed the task with this letter. We have circulated our response to your questions to each and every member of the Board. The Board has reviewed, commented upon and approved this letter.

This being said, however, we want you to appreciate the amount of time and resources the BFA staff and Board have expended to answer your questions. It was not a simple process, which is one of the reasons we declined a verbal interview in the first place. Far more important was our mutual need to ensure accuracy and completeness in any story you are writing.


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