FEGS Execs Got Fat Payouts as Bankruptcy Loomed Amid Rampant Mismanagement
By Josh Nathan-Kazis September 30, 2015
One month before one of the largest Jewish charities in the country admitted to donors that it had lost $20 million, the agency’s executive vice president got a $92,000 bonus.
The signs of the impending disaster that would soon send FEGS Health & Human Services spiraling into bankruptcy, and leave tens of thousands of its employees and clients uncertain about their jobs and their care should have been clear by then to the charity’s executives and trustees. In October 2014, when records show that Ira Machowsky got his bonus, FEGS was already in technical default on a $12 million bond issue. An internal review conducted in November of that year found that three-quarters of the group’s 350 programs were losing money.
Machowsky was expected to become FEGS’s CEO, but instead he was ushered out in December. Months after he left, FEGS’s attorney said in court that AllSector, a for-profit FEGS subsidiary that Machowsky championed, had been a massive financial black hole that swallowed a stunning $72 million of FEGS’s dollars between 2008 and 2014, delivered inadequate products and was a leading cause of the organization’s collapse.
Despite the management failures under his watch, Machowsky not only got his bonus, but also was handed another $35,000 in January, after he had already left the organization, to compensate him for unused vacation days. Gail Magaliff, the group’s former CEO, also got nearly $43,000 in January for unused vacation time. Low-level staffers, meanwhile, had to send dozens of letters to the bankruptcy court, demanding their vacation pay before the group coughed up the funds in August.
Six months after FEGS declared bankruptcy, court documents highlight massive ineptitude in the top ranks of a charity that once held itself out as a paragon of progressive not-for-profit management theory. The documents unveil cushy treatment of executives, and portray AllSector as an inexplicable money pit.
The documents also raise concerns that the quality of care at FEGS sites has deteriorated amid the collapse, describing serious staffing problems at facilities serving thousands of clients with developmental disabilities.
As evidence of FEGS’s mismanagement grows, former FEGS trustees and executives continue to refuse to answer questions about the debacle. Machowsky did not respond to multiple phone calls and an email. Magaliff, FEGS’s board chair, Allen Alter, and a handful of current and former board members contacted by the Forward also did not respond to requests for comment. The lawyer representing FEGS in the bankruptcy case, Burton Weston, responded to the Forward’s preliminary questions via email but did not offer responses to a longer set of subsequent questions.
Image by Anya Ulinich
The consequences of FEGS’s mismanagement have been deeply personal for the vulnerable people in its care. In the months after the bankruptcy, staffing levels at FEGS facilities for people with developmental disabilities fell precipitously. The 4,000 clients served in these programs have complex physical and psychological needs; many require high-level care. According to an affidavit filed in April by the current FEGS CEO, Kristin Woodlock, the programs had “more than 100 staff vacancies,” with 38 resignations in February and March alone. Remaining staff and their managers were working huge tranches of overtime; temps were taking the places of employees, and temp agencies were unable to meet FEGS’s demand.
The hand-off of these programs for adults with developmental disabilities has been more complicated than for some other parts of FEGS’s former business. All of FEGS’s programs funded by the New York State Office of Mental Health were passed on to the Jewish Board for Family and Children Services, and the WeCare programs funded through the Human Resources Association of New York were passed on to a rehabilitation services group called Fedcap. But the programs funded by the New York State Office for People With Developmental Disabilities have been split among nine new vendors.
Complex real estate issues held up the transfers, which were eventually authorized by the court in late May and completed in June. In between the first reports of trouble at FEGS in December and the transfers to the new vendors in June, however, staffing levels suffered. Employees called in sick to take advantage of accrued sick days that they knew would not be paid out, and others left amid uncertainty as to whether they would keep their jobs after their programs were passed on to the new agencies.
“Senior management has grave concerns regarding [FEGS’s] ability to maintain critical staffing levels at the [developmental disabilities] programs long enough to complete even an expedited transfer process,” Woodlock wrote in her April affidavit. FEGS “already faces serious challenges in maintaining adequate staffing.”
It’s not yet clear how the quality of care at the programs for the developmentally disabled was affected during the early months of the bankruptcy. Weston did not respond to a question about whether the quality of care diminished.
Meanwhile, as the hunt for answers about the FEGS disaster continues, the basic philosophy that drove FEGS for decades has come under scrutiny.
At a technology conference in November 2007, Al Miller, FEGS’s eminence grise, took the stage to describe what he called the “Fourth Sector” — the “synergy” of not-for-profit organizations and for-profit businesses. “The Fourth Sector presents great opportunities for entrepreneurs and investors,” said Miller, who was CEO of FEGS from 1975 until 2005, and in 2007 retained the title of executive consultant. (He retired soon after.) Describing AllSector, a FEGS subsidiary founded under his watch, Miller claimed that its “resources have given FEGS a massive competitive edge.”
Later in the speech, Miller repeated an oft-quoted Winston Churchill line, rhetorically linking the cause of his “Fourth Sector” and the war against Hitler: “This is not the end, this not even the beginning of the end. This is, perhaps, the end of the beginning.”
Created in 1998, AllSector was conceived as a way to scrape revenue out of FEGS’s IT department, turning it into a for-profit subsidiary with outside clients. FEGS owned 95% of AllSector; the other 5% was held by a man named Dan Greenburg, who sold a small firm called Crosswaves Technology to AllSector in the late 1990s.
From Greenburg’s perspective, AllSector was a small-time operation. Greenburg told the Forward that he never got any disbursements out of his 5% share in AllSector. “If it grew, I might have gotten something,” Greenburg said.
Inside FEGS, however, the “Fourth Sector” was a constant passion of the executive leadership for at least a decade and a half, and AllSector was put forth as its greatest success. “This was something that was held up to be smart, and was going to save and stabilize nonprofits,” said one person who was formerly in business with FEGS, and who asked not to be named to protect relationships. AllSector, the person said, was “held up as a positive example of how [the Fourth Sector] was working.”
Signs of trouble at AllSector did not emerge publicly until after FEGS’s collapse. The Forward reported on March 6 that AllSector had received increasingly large sums from FEGS beginning in 2011. FEGS acknowledged the full scale of the AllSector problem weeks later, at a bankruptcy hearing at the remote federal courthouse in Central Islip, New York.
“Between 2008 and 2014, we find that more than 72 million was expended from FEGS for IT services into… AllSector,” Weston said at the March 20 hearing, transcripts of which were kept under seal for months. “The nature of those payments, and the benefits realized by FEGS, is being reviewed by our own forensic accountants, and frankly outside accountants.”
Instead of making money for FEGS, AllSector sucked funds out of the charity. Weston called the drain on FEGS’s assets represented by those payments “debilitating,” and described it as a
“significant contributor” to the collapse. Even more startlingly, Weston said that the technological services that AllSector provided to FEGS in return for the $72 million were themselves so inadequate that they constituted another cause of the FEGS collapse. Weston blamed an “inadequate financial system and revenue cycle management system, notwithstanding [the] 72 million that went to AllSector for IT, which severely compromised our ability to… monitor spending and accounts receivable to make on-time business decisions.”
When contacted by the Forward, Miller professed shock at the amount of cash FEGS’s attorney reported had been sent to AllSector since 2008. “It doesn’t make any sense to me,” he said. Still, Miller defended the principle of the “Fourth Sector.” He compared FEGS to the failed airline Pan Am, which created the first international passenger air routes in the late 1930s and entered bankruptcy in the 1990s. “Because Pan Am went out of business eventually, are you going to say the original idea of Pan Am was wrong?” he asked.
While setting up for-profit subsidiaries is not uncommon among large not-for-profits, some experts have criticized the practice. “I think inevitably they almost all end in tears,” said Dean Zerbe, who was senior counsel and tax counsel to the U.S. Senate Committee on Finance from 2001 to 2008, and now works as national managing director of alliantgroup, a tax advisory firm. “It becomes all foggy. You don’t have the discipline of the for-profit.”
FEGS brass don’t appear to have suffered for their for-profit subsidiary’s dismal performance. According to Greenburg, Machowsky himself represented FEGS as AllSector’s major shareholder. Yet as AllSector was swallowing FEGS whole, records filed with the bankruptcy court in April show that Machowsky received $91,616 in “Bonus Earnings” on October 10, 2014. That was on top of his base compensation, which in the fiscal year ending in June 2013 was $343,000.
Machowsky did not respond to an inquiry about the bonus. Weston, FEGS’s attorney, did not respond to a question about who approved the bonus and whether current FEGS management continues to believe that the decision to award the bonus was proper at the time.
As the Forward has reported previously, FEGS brass began to acknowledge their organization’s dire financial straights a month after Machowsky was awarded his bonus. On November 19, FEGS approached UJA-Federation of New York to admit that it had run a $19.4 million loss in the fiscal year that ended that June. At the March 20 bankruptcy hearing, Weston told the court that Woodlock, at that time the group’s chief administrative officer, and Gayle Horwitz, the current chief administrative officer who at that time was the group’s brand-new chief financial officer, had insisted on a full analysis of FEGS’s programs and finances last November.
“A catalog of shortcomings start[ed] to be revealed,” Weston said. “Of the 350 programs that we administer, approximately 74% [were] losing money.”
The analysis, Weston said, found other problems, too: A “bloated administrative structure,” a “concentration on top-line growth without real concern [for] contract viability,” and “a lack of focus on expenses during a climate of declining revenues,” among other things.
Despite the litany of errors by management — many of which were revealed in November — the remuneration of the group’s leadership was little affected. Machowsky continued to collect his $14,004.04 biweekly salary through the end of December, and on January 2 he was paid out $35,000 in accrued vacation pay. Magaliff was also paid through the end of December before collecting her own tens of thousands of dollars in vacation pay. Her base compensation the previous year had been $427,700. (Magaliff has filed a lawsuit demanding even more money out of FEGS — $1.2 million in deferred compensation she claims she is owed.)
Low-level staffers had a harder time collecting their own vacation pay. Beginning late this past July, about 100 former FEGS employees filed letters with the bankruptcy court, saying they had been told they would receive accrued vacation pay in June or July but had not. “It is a hardship for me to not have this money,” the letters ended.
The staffers were eventually paid for their unused vacation days on August 7.
Contact Josh Nathan-Kazis at [email protected] or on Twitter, @joshnathankazis
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