May 5, 2015
Bankruptcy filings detail FEGS descent
Hundreds of pages of documents filed today in federal bankruptcy court paint the clearest picture yet of what went wrong at FEGS, the multi-million dollar New York social service agency that shocked the nonprofit community when it announced its collapse in January.
The bankruptcy filing by the Federation Employment and Guidance Service lists some of the institutions likely first in line for debt payments from FEGS, and include an affidavit from current C.E.O. Kristin Woodlock offering an explanation of how the nonprofit arrived in bankruptcy court this morning.
The filings include the text of a FEGS board resolution, which was signed on March 11 this year by the board's 29 members to file for bankruptcy. The document also shows that the leadership sought advice from financial consultants in early December 2014 about pursuing bankruptcy, weeks before the Daily Forward first reported FEGS' surprise $19 million funding shortfall, and months before the charity announced it would cease operations.
Woodlock's affidavit reveals an agency that made significant mistakes. Among them, creating for-profit subsidiaries that failed to thrive and required subsidies, expanding government contracts for programs that didn't generate enough revenue to cover their operational expenses, and borrowing heavily to pay for building leases and new equipment without a solid plan to pay back the debt.
"An outdated financial management system led to delays and considerable losses in billing and cash collections, causing a further drain on available cash and also compromised management's ability to make responsive business decisions in a timely manner," wrote FEGS C.E.O. Kristin Woodlock in her affidavit.
Woodlock cited the generally challenging climate for nonprofits, decreases in revenue and increases in operating costs, and an over-emphasis on growth, without due consideration of whether new contracts were viable.
She also pointed to an "overly prohibitive administrative cost structure which was significantly more than target industry standards, coupled with the inability to keep pace with the growing organizational complexities of the organization as a whole."
FEGS' salaries for its top executives increased even as program revenue declined in recent years. And the charity's for-profit subsidiaries—particularly AllSector, HR Dynamics and Single Point, which have come under scrutiny since the announcement of FEGS' troubles in January—were established in an effort to generate income, Woodlock said. But in practice, they did not attract third-party clients and ended up being funded largely through work for their parent company.
"As a result, instead of its administrative costs subsequently being reduced, FEGS was forced to fund these affiliates' cash requirements and losses," wrote Woodlock.
The charity's debts are substantial, the filing shows.
FEGS owes its single largest creditor, The Dormitory Authority of the State of New York (DASNY), a total of $12.25 million for tens of millions of dollars in loans it received to build new housing facilities for the agency's clients. This is in line with financial documents from mid-2014 which showed the nonprofit owed DASNY for the principal on its mounting debts.
In terms of secure loans, wherein there is collateral to guarantee repayment, Bank of America is owed $4.69 million, JPMorgan Chase $4.04 million, the New York City Industrial Development Agency is owed $2.92 million and the state Office of Mental Health is owed $1.04 million.
The filings also include a lengthy list of unsecured claims, where there is no guarantee that they will ever be payed out.
Among the top 20 creditors with unsecured claims—all listed as disputed in the filing—Oxford Health Plans, owed $4.2 million for a trade debt, the state Office of Mental Health, owed $2.34 million in loans, the F.O.J.P. Service Corp., owed $1.34 million for a trade debt, and the Bronx Lebanon Hospital Center, owed $665,000 also for a trade debt. The list also includes the nonprofit's former auditors, Loeb & Troper, who are owed $236,000, and the Department of Housing and Urban Development, owed $137,000.
The filings show FEGS has contracted a new auditor, Crowe Horwath, to replace the firm Loeb & Troper, which some nonprofit experts have criticized for not performing a thorough audit on FEGS and its subsidiaries last year.
Additionally, FEGS has been working with restructuring firm J.L. Consulting to evaluate its expenses and streamline its operations before filing for bankruptcy, and proposes to keep them on as a consultant through the bankruptcy process.
"General operational and administrative inefficiencies also pervaded the debtor's program," wrote Woodlock in her affidavit.
The filings include close to 100 pages of real estate listings owned and leased by FEGS, many of which had become unnecessary but which were governed by costly leases that were difficult or impossible for the charity to break.
"The Debtor [FEGS] was also overburdened by multiple space obligations which substantially exceeded the Debtor's physical needs and financial capabilities, leading to significant un-reimbursable costs as a result of the unallocated and vacant space," said Woodlock in her affidavit.
FEGS has requested a 30-day extension to file the required schedules and statements. If granted, they would have until May 2 to submit those to the court.
“The state remains committed to ensuring the continuity of care for all individuals served by FEGS," said a spokesperson on behalf of both the state Office for People With Developmental Disabilities and the Office of Mental Health, in a statement. "We are aware of today’s bankruptcy filing and we will continue to work with all affected parties and the court to ensure that the transition of services best meets the needs of the individuals currently receiving critical services from FEGS and the people who support them."