Closure of Major New York City Nonprofit Years in the Making

The collapse of one of New York City's largest and best-regarded social services organizations was the result of a series of risky financial decisions over many years, Capital New York reports.

The announcement earlier this year that Federation and Employment Guidance Services, a health and human services nonprofit, planned to close amid a $20 million revenue shortfall shocked many in the nonprofit sector. According to Capital New York, financial disclosure forms and tax returns reveal that FEGS had been making risky investments for years and was slowly drowning in debt, borrowing from an ever-widening array of sources to expand operations into for-profit subsidiaries that failed to generate profits. Among other things, the organization launched a managed long-term care spin-off that ultimately failed; invested in offshore funds in the Cayman Islands, Greenland, and Iceland; engaged in unusual auditing practices; increased salaries for executives even as its debts mounted; and may now owe the state tens of millions of dollars for Medicaid overcharges. The Jewish Daily Forward has reported that the organization had transferred millions of dollars to its subsidiaries by 2011; such transfers of funds did not appear in the tax forms the organization filed with IRS or the consolidated audit prepared by its long-time accounting firm, Loeb & Troper — a firm with ties to the Met Council on Jewish Poverty and the New York Legal Assistance Group, both of which have been embroiled in accounting scandals — because the audit did not separately detail the financials of the organization's subsidiaries.

Meanwhile, the organization's $250 million annual budget was propped up largely by city and state grants and roughly $200 million in annual revenue from state and federal Medicaid funding. The organization effectively used loans and grants to cover up its losses from its unprofitable for-profit subsidiaries until the debt became insurmountable. According to its financial reports, FEGS had very little cash on hand and, therefore, could not absorb unexpected financial setbacks. Disclosure documents reveal that one of FEGS' subsidiaries was audited by the New York Office of Medicaid Inspector General, which found that of $80 million in Medicaid payments examined, the group had overcharged between $13 million and $20 million. In 2014, the organization failed to meet the state's debt service requirements and indicated it would seek a waiver from the state, after which New York City decided against renewing two contracts for employment and training programs, resulting in a loss of $11 million for the organization.

Now the organization is considering whether to declare bankruptcy, sources familiar with discussions among its leadership and other social services agencies said, and state and city agencies are scrambling to transfer its caseload of two hundred social services programs to other organizations. The implications for the social service sector aren't just financial and logistical but also political, raising questions about how well-connected directors, regulatory entities, and elected officials failed to see the problems at the organization. The offices of the Manhattan district attorney and the state attorney general reportedly are investigating the circumstances leading up to the organization's collapse, while the Human Services Council and UJA-Federation of New York, one of its funders, have launched their own inquiries.

"Somehow the issue to me is board governance," said Naomi Levine, director of New York University's Center for Philanthropy and Fundraising. "Boards are critical and they are not being trained properly. If the boards assumed those responsibilities you might avoid the tragedy that happened at FEGS."

Bill Josephson, an expert on tax-exempt organizations and a former assistant attorney general-in-charge of the Charities Bureau in the New York State Attorney General's Office, told Capital New York that the nonprofit's tax returns would have made it virtually impossible for board members to know which assets belonged to the nonprofit and for-profit subsidiaries. "If the auditor is doing its job," said Josephson, "then it in fact prepares an audited statement or relies on an audited statement that's prepared for each separate entity and then it compiles them."

Laura Nahmias, Dan Goldberg, Nidhi Prakash. "The Wrecking of a Blue-Chip New York Nonprofit." Capital New York 03/13/2015. Josh Nathan-Kazis. "Why Did FEGS Funnel Millions to For-Profit Tech Subsidiary?." Jewish Daily Forward 03/06/2015.