New Fiscal Guidelines Failed To Sound Alarm

In the wake of financial scandals at two of its most prominent agencies, the board of UJA-Federation adopted new accountability guidelines for its beneficiary agency boards and senior management.

The November 2013 guidelines stressed that “as a major funder of its network agencies,” UJA-Federation “has a vital role in ensuring the strength of this partnership,” and that the goal of the new guidelines was to “ensure that agency boards have the tools needed to meet their responsibilities and to provide UJA-Federation with early warning of potential financial challenges at agencies.”

It went on to detail UJA-Federation’s “minimum” expectations of each agency and said its “evaluation of how well an agency meets these expectations will be an integral part of UJA-Federation’s grant-making decisions beginning with FY15 grants that are awarded next spring.” It added that each agency would be required to certify compliance, and that those receiving a core operating grant of at least $200,000 would be required to provide material proof of their compliance. For fiscal year 2015, FEGS, one of its major beneficiary agencies, received a UJA-Federation grant of $5.13 million.

But just over a year after those new guidelines were adopted, FEGS announced that it was forced to close because of a major deficit that it put at $19.4 million, though at least two sources said the losses were more than double that figure. Although officials of UJA-Federation chose not to discuss the closing or when they learned of FEGS’ financial collapse, one source said the gravity of FEGS’ financial situation came as a shock to UJA-Federation officials and board members.

“They did not see it until they were told in December — just one week before it became public,” said the source, who asked for anonymity because of the sensitivity of the issue.

He said FEGS’ senior officials and board members did not realize “until late in the game, the late fall” — that they were in dire trouble. They then hired a turnaround company and a public relations firm.

“The turnaround company had no experience with nonprofits or the Jewish community,” the source said. “My sense is that it did not have the skills to make the right moves and so it said close it down.” (FEGS would not say which company the agency worked with.)

Historically, UJA-Federation would step in to help save such a major agency by having it merge with another organization.

Such actions in the past “saved the services and the reputation of the Jewish community,” said the source.

But FEGS had reportedly been borrowing money for at least a year in order to meet expenses. Sources said money from the city and state programs FEGS was contracted to operate was insufficient to pay expenses and that FEGS had too many failed performance-based contracts.

A spokeswoman for FEGS (Federation Employment and Guidance Service) said in a statement that the financial losses stemmed from many factors, “including poor financial performance on certain contracts, contracts that did not cover their full costs, investments in unsuccessful mission-related ventures, write-offs of accrued program revenue, and costs resulting from excess real estate.”

The statement added that “FEGS reached this decision after rigorous evaluation to ensure the best possible outcome for FEGS’ clients and staff, working with outside financial and restructuring experts, and consulting with all of its government funders and other partners. This analysis showed that the financial situation which FEGS confronts was too deep to be resolved by continuing to run its programs.”

Not only did the new accountability guidelines fail to provide UJA-Federation with warning signs of a financial collapse at FEGS, they failed to reveal financial improprieties at another UJA-Federation agency, New York Legal Assistance Group, or NYLAG.

A founder of the organization, Yisroel Schulman, 51, abruptly resigned last week after learning that a federal grand jury was investigating financial irregularities at his agency.

A spokeswoman for the organization at first insisted that Schulman, who co-founded NYLAG in 1990, was not available for comment and had simply retired to pursue other interests.

But after the New York Law Journal reported that Schulman had actually resigned because a Manhattan federal grand jury was investigating “accounting irregularities” at NYLAG, sources confirmed the probe and revealed that Schulman was the focus of the grand jury investigation.

A spokeswoman for NYLAG issued a statement saying: “We are confident the matter involving our former CEO will not interfere with the important legal services our dedicated team provides New Yorkers on a daily basis.”

A source insisted that the organization “is not out any money and its endowment is intact. … There is no question about the integrity of the current management.”

Beth Goldman, a former New York City commissioner of finance, is slated to replace Schulman next week.

The federal investigation of NYLAG comes as Allison Sesso, executive director of the Human Services Council, said “an autopsy on their [FEGS’] autopsy is being conducted by government and private funders” to learn what caused FEGS to decide to shut down.

The Daily News reported that the government probes were launched by both the office of New York Attorney General Eric Schneiderman and Manhattan District Attorney Cyrus Vance. Both offices declined to comment.

A spokeswoman for FEGS said that to date, the forensic analysis has not found evidence of “fraud or malfeasance.”

The probes of these two agencies follows scandals at two other UJA-Federation agencies: the 92nd Street Y, in which an alleged kickback scheme led to the firing of the executive director and two other employees; and the Metropolitan Council on Jewish Poverty, in which the former CEO and other top executives were convicted and imprisoned for running an insurance kickback scheme.

“It is certainly clear that the Jewish community is going to have to do a certain amount of soul searching given the significant number of scandals and mismanagement that we have seen in recent years,” said Jonathan Sarna, a professor of American Jewish history at Brandeis University.

He said the mismanagement at FEGS is “particularly unfortunate because it is clear that so many of our most neediest” may suffer because of the closure. Efforts to move FEGS’ many state and city programs to other agencies are now taking place. Sesso said it is up to the state and city governments to announce such moves because “they are not FEGS’ contracts anymore.”

Sarna said the scandals and mismanagement at these UJA-Federation-funded agencies “highlight the growing importance of transparency — and there are more and more donors who are demanding transparency precisely because of these kinds of situations. The fear is that they are not getting what they expect. If these concerns are not addressed, it will have a bad impact on philanthropy in general and Jewish philanthropy in particular.”

Asked to make someone available to address the possible impact the agency scandals and mismanagement might have on fundraising, a spokeswoman for UJA-Federation sent the following email:

“We are ahead in both the dollars raised and the number of donors to our annual campaign over last year. We’re grateful for the generosity of our donors who come to us because they want to have an impact on a broad range of issues and because they understand that the strength of our network allows us to leverage the collective expertise and services of leading agencies throughout the city so that clients are best served today and every day.”

It is believed that FEGS officlals asked UJA-Federation staff not to comment on the situation, and that the request was honored. A spokeswoman at FEGS declined to make anyone available to the press to discuss the decision to close. She emailed a statement similar to one issued a week ago that spoke of FEGS’ efforts to transfer programs and services to other providers.

“FEGS is committed to ensuring that this process is undertaken in a sensitive, constructive, and orderly manner that ensures continuity of services for clients and supports FEGS’ staff. Wherever possible, FEGS will work to facilitate transfers of staff to other organizations, or where that is not possible support them in identifying other opportunities,” the statement said.

An examination of FEGS’ 2012 990 financial statement — the latest one available — revealed that the organization was having financial difficulties that year; its annual fundraising dinner, for instance, actually lost money — at a time when the organization’s 17 top salaried employees were earning a total of $4.2 million. Fifteen of them earned between $200,000 and $482,436, the top salary going to former CEO Gail Magaliff, who also was receiving more than $156,000 in benefits. Her top assistant, Ira Machowsky, earned a salary of $454,739.

The Daily News reported that internal documents revealed that, even as FEGS’ bosses borrowed money to keep the 80-year-old organization alive, none of its employees took a pay cut — including 81 of them who earned at least $100,000 last year. It said also that some senior employees actually received pay hikes, including the organization’s comptroller, Michael Kirshner, whose salary jumped from $190,000 in fiscal year 2013 to a budgeted $215,000 this year.

Both Magaliff and Machowsky left FEGS just as the extent of its financial difficulties were becoming clear. The FEGS spokeswoman declined to reply when asked how much of a pension they would receive.

Sesso, of the Human Services Council, a membership association of non-profit human service providers of which UJA-Federation and FEGS are members, insisted that although “mismanagement caused the problem [at FEGS], the level of the salaries for the size of the agency” was not a factor. FEGS had an annual budget of about $250 million, employed about 3,000 people, and served 135,000 New Yorkers annually — among them about 20,000 Jews — in such areas as health and disabilities, home care, job training and immigrant services

“If you look at the for-profits, they have much larger salaries for managing the same level of business,” she said.

But Sarna, the Brandeis professor, said the high salaries paid at FEGS “raises anew questions about compensation in the nonprofit sector and the hidden costs of those very high salaries — which in some cases endanger the very mission of the organization and in other cases are unseemly given the charitable nature of the work.”

stewart@jewishweek.org