Last week I submitted descriptions of various activities undertaken by the leaders of Mid-Continent Railway Historical Society and asked the reader if he or she considered each to be a crafty or unethical project, in other words, a scheme. I shall expand on those involving the finances of this organization from information I can gather from 990 forms and other publications. Again, this submission to RYPN is primarily directed to the voting members of Mid-Continent Railway Historical Society but also may be important to all voting members of railroad preservation organizations.

All members of Mid-Continent Railway Historical Society received a letter this past autumn from the treasurer of the organization with the primary purpose to promote opening a second tourist operation in Mazomanie, a village with a population of about 2,000. As a lead up to promoting this new idea, there was a discourse about the financial successes of MCRHS under the leadership of a hired consultant manager, who happened to be a good friend of the treasurer (so much for financial checks and balances and independent oversight). The highlight on page 3 of this letter was a graph showing a continual ramping-up of revenues from 1982 to 2009 with three spikes in revenue occurring in 1992, 2000, and 2007-2008. The first spike coincided with the highest number of ticket sales in the history of the museum. The second spike is due to fundraising for restoration of Milwaukee, Lake Shore & Western coach No. 63, which cost $350,000. And the third spike is the result of a major restoration of Wisconsin Fish Commission fish car, Badger No. 2, which had an original price tag of $950,000. Both of these latter projects were helped by matching funds provided by William Jeffris of Jeffris Family Foundation. The ramp-up of revenues was due, in part, to increased donations generated by the contract manager, but most may have been due to some fancy accounting that made up for the downturn in ticket sales. I will explain.

It appears to me that donations coming into an organization for specific projects are listed on the books as temporarily restricted funds, as per SFAS 116. These funds are kept on the books as temporarily restricted funds until they are spent on projects defined by the restrictions. Following generally accepted accounting practices, the funds are debited from the temporarily restricted fund and added to unrestricted funds and expensed funds are capitalized, if used for capital improvements. It appears to me that the leaders of MCRHS are listing a donation as income then listing it again as income when the donation is spent. I am not an accountant but this appears to be double-dipping to me. I find it especially egregious if the money is spent on a privately owned steam locomotive that is capitalized as an asset of the organization. Thus, when MCRHS goes to a bank for a loan and the bank glances at the growing asset value of the organization, it looks good. Is this fraud? I do not know. Those who visited Mid-Continent Railway Museum in the early 1990s and again in 2007 would probably find no differences (except no working steam locomotives), yet the assets of property and equipment have increased from $376,373 in 1999 to $1,798,822 in 2009, mostly due to locomotive values increasing from $130,260 in 2003 to $1,414,224. In all fairness, $163,352 was spent on repair of flood-damaged traction motors on three of the diesels by the end of the last published fiscal year.

Another problem I see is the fact that the contract manager was able to convince the board of directors to agree to set his salary as a percentage of gross income for the Society for the previous year, starting at 5% for 2009 and ramping up a percentage per year to 10%. He also refused to be subjected to any performance reviews. Since the gross income for 2008 was $1,496,945, the manager experienced a jump in salary from $48,000 in 2008 to nearly $75,000 but should have seen his salary drop to $35,167 ($586,108 x 6%) in 2010. Maybe this is why he chose not to renew his contract for 2011. Were the leaders of MCRHS bamboozled?

One thing I wish to point out here is that the contract manager was not responsible for the successful fundraising of $475,000 to meet the Jeffris matching fund during 2007-2008. The fundraiser for this project was a lady Mr. Jeffris requested and this person was paid $40,000 to help MCRHS meet its goal (if I remember correctly from when I was on the board). Another point is that MCRHS did not meet its goal, even with a professional fundraiser, so Mr. Jeffris appears to have donated another $53,000 in 2008 to help. As a postscript to this story, MCRHS was sued by Avalon Rail, Inc. for breach of contract for somewhere around $88,000 in cost overruns for Badger No. 2 and the car was sent back to North Freedom without completing the project. I have been told the case went to arbitration and Avalon and MCRHS split the difference after expensive legal costs to MCRHS. Another postscript is that the MCRHS liaison became an Avalon employee. Were the leaders of MCRHS bamboozled again? I believe so.

The 2008 flood resulted in about three feet of water over the tracks of the main and yard. Because of this flood and the inability (or unwillingness) of the president to move the operating equipment to higher ground, the traction motors of four diesel locomotives were flooded. Compounding the problem was the decision by management to operate one diesel after the flood without properly caring for the traction motors, thus causing the motors to burn out. Members were told costs to repair Pullman (Navy) No. 4, a 45 ton GE, would be $86,165; repair Army No. 1256 would be $45,145; and John Morrell & Co. No. 7 would be $59,970. A fundraising campaign was needed to repair the traction motors of Milwaukee Road No. 988 and the goal was $80,000. All the trucks were removed and trucked to L & S Electrical, Inc. and all but those for No. 988 have come back. I have been told MCRHS overpaid for the work and I do not know if competing bids were requested. I cannot judge fair pricing for these. Were the leaders of MCRHS again bamboozled or were they irresponsible or was this ok?

I described in my submission last week the capitalizing of repairs conducted on the privately owned steam locomotive Western Coal & Coke No. 1 by what appears to be over $1,000,000, a number that is derived from comparing asset values for locomotives in FY2002-2003 with values in FY2007-2008. However, this is a simple locomotive, repairs are nowhere near completed, and records exist in the engine shop that account for only about $300,000 to $350,000 in repairs. There are only two ways I can think of to account for such a large discrepancy. One way is that the books were cooked to falsely capitalize repairs that never happened with money that was never donated. The auditors should have caught this fraud. The other way is that a million dollars was donated to the Help Steam Live program over the decade but some of the money was spent on other things such as keeping the diesel-powered tourist train operating. The auditors may not have caught such activities. I seem to remember the IRS investigating the books of a railroad museum in New England and finding that funds raised for one project were used elsewhere. I believe the IRS told the board of directors they either had to find unrestricted funds to replace the used restricted funds or write personal checks to replace the money. Is this true?

In 2006 I asked the president to explain large discrepancies I found between what the board was being told in monthly statements and what appeared in the annual report to members. I never received a reply. When I commented about the accounting at a board meeting, the treasurer back then told me that was what the auditors were for. I did not think at the time to point out that Enron and WorldCom were audited by the best firms in the U.S. and their leaders were committing serious financial fraud. Their leaders are still sitting in prison.

I have obtained copies of mortgage agreements between Mid-Continent Railway Historical Society and U.S. Small Business Administration and Community First Bank of Baraboo by simply walking into the Sauk County Registrars Office and paying $32. Document numbers 976327 and 981820 describe loan agreements between MCRHS and the SBA for $465,200 dated December 20, 2008 and the second for the same amount and same date signed by the president and secretary of MCRHS and notarized on January 3, 2009 and March 20, 2009, respectively. Likewise, document numbers 961326 and 961327 describe loan agreements between MCRHS and Community First Bank for $130,000 and $225,000, respectively, both are signed by the Contract Manager and dated May 17, 2009. Interestingly, both have leans on the same parcels of land. Also, the Community First Bank documents state the "Mortgagor covenants and warrants: (c) to keep the Property free from liens and encumbrances superior to the lien of this Mortgage and not described in paragraph 2 on page 1." Paragraph 2 on page 1 is blank. Also, the SBA documents have a similar wording on section 1, paragraph h. I am not a lawyer but this surely appears to be a breach of contract or fraud to me. I may add that I am glad my signature is not on any of these documents.

My submission to RYPN.org next week will explore whether the operation owned by MCRHS is really a museum or a tourist railroad.

I think I get it now; "byronlong" is actually Glen Beck, right?

[quote="byronlong"] I have obtained copies of mortgage agreements between Mid-Continent Railway Historical Society and U.S. Small Business Administration and Community First Bank of Baraboo by simply walking into the Sauk County Registrars Office and paying $32. *** Interestingly, both have leans on the same parcels of land. Also, the Community First Bank documents state the "Mortgagor covenants and warrants: (c) to keep the Property free from liens and encumbrances superior to the lien of this Mortgage and not described in paragraph 2 on page 1." Paragraph 2 on page 1 is blank. Also, the SBA documents have a similar wording on section 1, paragraph h. I am not a lawyer but this surely appears to be a breach of contract or fraud to me. I may add that I am glad my signature is not on any of these documents. [/quote]

So are the liens senior or junior in right to the mortgage lien? Without that key bit of information just for starters, this entire paragraph is meaningless. Do you know the difference? If the latter, how can there possibly be a breach of contract if a junior lien, such as a second mortgage, is afterward recorded? The designation of any existing senior encumbrances in a mortgage note, if there are any, is done in part to prevent the lender from the possibility of being wiped out in a foreclosure of a senior interest that was unknown to it. If their are none, the space for designating them is naturally left blank. "Breach of contract" are awfully big words for a non-lawyer to throw about, as is "fraud." Do you know the elements of fraud at common law? Has Wisconsin enacted statutory elements? (You may want to look up "libel" while you're at it ....)

I wonder if readers with professional knowledge in the fields which the other parts of Mr. Long's post addresses have found his other allegations of "bamboozling" to be similarly devoid of critical information, while nevertheless reaching conclusions well beyond the capacity of a non-professional. Aspects of his postings remind me of a newspaper article that reveals itself to a person with knowledge of a particular subject to be complete nonsence, and thus casts into doubt the entire edition.

Mention is made of Badger 2 and one other car in major restoration efforts. Perhaps this is where the increase in assets occurred? Were there any other projects that resulted in capital improvements? The numbers being bandied about need to be documented a lot better.

While the amount of funds spent on Badger were enough to have operated our museum in perpetuity and completed all restoration work with volunteer labor at our museum, if someone wants to donate for a project, the project gets done, and the members restored what they were requested to accomplish with the funds, it sounds like someone disagrees with the direction of the organization.

Is an economic analysis required for projects? If not, then maybe that's what needs to be considered.

Herb Sakalaucks
Chairman
Colfax Railroad Museum

One other technical note, which I think I'm finding in he middle of the muddle.....the market value of an obsolete railroad car is hardly ever anything near the cost of its restoration. Basing value on compilation of acquisition, restoration, and incidental costs to find a total is a form of bogosity in almost every case I've run across. Even finding a market that would include a willing buyer and seller with any recent transactions for a similar object can be impossible in may cases - the fish car being a good example of a one of a kind. Not everything that is rare is valuable because of its rarity - some things are rare because nobody wants them and most were purposely destroyed long ago.

dave

Agreed. But from an accounting perspective, you can value either at market or at cost, and then the restoration cost would be considered if the cost method is used.

A budget of $950,000 for a partial (non-mechanical) restoration of a fish car? Wow! And another restoration that will sit in the back of a barn, only seen by the few guests that wander back there after an excursion train.

While I understand that museums will send out some items for outside work - rebuilding brake valves or turning drivers, for example - if your museum has to send out an item such as the fish car for non-operational repairs, I begin to question the museum's mission. Isn't performing restoration a key part of your museum's mission?

I agree that these posts throw around accusations such as fraud too casually. To understand the legal and accounting issues discussed here you would need several years of either law school or an accounting curriculum. And even then you get differences of opinion from CPAs and attorneys on these issues. Speaking as an ex-treasurer for a non-profit equipment-operating group, I think that the valuation of these items doesn't have much meaning as the equipment isn't for sale, the group doesn't pay capital-gains taxes, sell stock, etc. So I would advise not to spend a lot of time on this issue.

That said, if a group is using these numbers to get a loan or other financial benefit, that changes things completely. I won't pass judgment on MCRM's financial situation as I don't know enough about it, but I would be concerned if a group such as MCRM was taking out six-figure loans on a semi-regular basis. Do we know why these loans were taken out, while at the same time MCRM raised huge amounts of money to restore the fish car and a few other pieces of equipment? Given that MCRM's attendance has been dropping for 10 years or more, how are they going to get paid off?

In general, I don't think groups in this business should take out loans, except possibly for a one-time major event. And I am surprised that a bank would make such a loan. What is MCRM's total debt now?

Chris.

The only thing "FUN & SUE" have in common is U. What fun is it to volunteer at a musuem if you have to worry about being sued. Illinois may have screwed up government but in Wisconsin we can't get together, play trains,and be nice. Sad day for sure.

Quite frankly, I'm amazed that these allegations are allowed to continue here.

I have no dog in this hunt, but it seems like providing a platform for these posts, RYPN is condoning any potential libel that is being committed here.

It's clear byronlong has an axe to grind, and he's using this forum as his grindstone. What's worse is that there is no rebuttal from the MCRHS, so a casual visitor is left to assume his version of the story is "truth".

Just as a matter of law, no: in the US the operator of a listserv and website is a user of interactive computer services entitled to the protections of the Communications Decency Act ("CDA") against liability arising out of his publication of information provided by another information provider.

Key case is Betzel v Cremers, 9th Circuit.

http://www.internetlibrary.com/cases/lib_case328.cfm

I, too, share Brother Kap's concerns. I don't have any objections to a thorough, back-and-forth discussion of potentially valid accounting, managerial, or strategic concerns regarding a museum such as MCRM (we've discussed plenty of other such museums for better and worse), but the lack of rebuttal from members, representatives, or parties more sympathetic to the cause of MCRM is likely to be due to one of several possibilities:

*No one at, or connected with, MCRM is aware of these postings and allegations, in which case we have to wonder if this "venting" is in any way useful or educational;
*The allegations made are so without merit that they are rightfully being ignored;
*The allegations are spot on, and parties hope the image of a "lone crank" will help to dissipate any impact of the airings of the allegations;
*MCRM is quietly preparing for possible libel/slander litigation.

The reality probably lies somewhere between these various extremes.

In journalism, protocol would mandate that MCRM be contacted for a proper and official response, or at least an opportunity to respond. I would want to afford them at least the courtesy of the request, if I were in charge.

But, yes, a week-by-week "campaign" against a specific organization in this forum does, indeed, make me ill at ease.

I know, you can beat the rap, but you can't beat the ride... it'd still be a lot of unpleasantness that, I'm guessing, given the volunteer nature of this endeavor, that I'm pretty sure would spell the end of it.

And it nearly was once before, due to threats by Ross Rowland, despite the fact that his complaints were without merit.

You have to be thick-skinned to be in the business of running a site such as this.

I would love to hear MCRM reply to what's been posted on this site, and I think such a dialogue has been long overdue.

Chris.

Ed, if you see a violation of the terms of service, then report it to the moderators. It is their job to judge and evaluate the content of this site. I think if push ever came to shove, there are at least two attorneys on this site that could probably help the non profit RYPN.

On a serious note, the "blogs" from the original poster hilights the many challenges facing MCRHS and other museums, espcially about their mission, museum governance, finances, etc., are all serious issues that need to be discussed. I have come to the non-unique conclusion that many museums are in serious trouble as the founding generation dies out and the museums find themselves without experienced volunteers, or adequate finances.

The real question, which I think is appropriate to this forum is "What happened" to museums such as Mid Continent, who were leaders in their fields for decades (wood car preservation)? Why, after all of these wonderful in-house restorations, does a museum have to spend $1million for an outside contractor to do a wood car restoration?

Are we a train club, a museum, or a tourist railroad? This is an old question, but one that is currently in play for many museums. How does this interface with museum governance? What happens after the founding generation has moved on, and those with the sharpest elbows have pushed out others in the organization?

These are all serious issues that should be discussed on a site such as RYPN. It is uncomfortable at times, and but if this site wants to be a preservation site, they are issues that need to be addressed. Many complain that this site isn't a "preservation site" anymore, but balk at serious discussions. For those who do, I guess they would rather bury their heads in the sand and talk about breaking the Mallard's record.

I can offer some insight on the Badger project from a nonmember perspective. Our museum has had contacts with the Jefferies Foundation on a restoration effort we were planning. They wanted a complete, beginning to end involvement with the project and only professional restoration experts to work on the project. We were looking at a project that had been started and would have been done by volunteers with experience in wooden car restoration. The cost to transport the car to an offsite restoration facility was more than we had projected for the entire project done with volunteers. Sadly, we're still trying to raise the $100,000 needed to restore all our equipment, while the larger Badger project is funded and done.

I've had a number of comments from larger foundations that have assisted in big dollar restoration work that they've been burnt by unfinished projects/high cost overruns, that seem to indicate that they're now more interested in exhibits that draw crowds than restoration assistance. If Badger truly had the problems listed, it may have poisoned the well for a lot of smaller museums.

The big projects are nice, but it's like the NCAA tournaments. The mid size and smaller museums can't get in the door with donors, while the big boys keep on spending. Our museum runs an operating budget of $8,000 a year and restoration on a project by project basis. We spend as much time trying to raise the $8000 a year as we spend on restoration work.

Herb Sakalaucks
Colfax RR Museum

As one of the moderators, I need to say a couple of things…

This is a forum… a forum to discuss railroad preservation, how that might be done, be It; wood work, metal work, mechanics, boilers, railway operations, but also the organization(s) which enables the work. I prefer issues of how to do “it”… but that is not enough. We need organizations to oversee and manage what we do.

Issues of organization are therefore appropriate for the forum.

One of the key issues about museums, is how we make our decisions… our museum decisions… what to do, what to save, how to fund our projects, how to budget our projects, how to present our projects, how to interpret what we have chosen to save… and how we present all to our visitors. What members may direct, what is not appropriate… how we proceed.

Long before the current Mid Continent discussion surfaced, there was a private conversation with moderators before the first post in the series… asking if and how it could proceed… so far the rules laid down have not been violated.
Our organizations are held to rules, as part of our mission, our public trust. Therefore what we do can be and will be questioned. Likely in public… So the Mid Contentent discussion here, can be viewed in that theater… a theater of friends and interested parties…

Clearly Brian has a point of view and a axe to sway…

Consider his issues and complaints… consider his point of view… You may have a Brian in your organization who can question your board’s decisions… How would you look if similar questions were asked about your group?

I would like to suggest that we read his words, and the words in opposing, ask questions, and make our own decisions… and think about the moment when other ask us the questions…