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FEGS Collapse Sign of ‘Dire’ Conditions for Jewish Social Service Agencies

Shaken by the abrupt collapse of one of New York’s largest social service agencies, a consortium of not-for-profit groups is warning that others may also be in jeopardy if government doesn’t radically reform the way it works with outside groups.

A report released today by the Human Services Council, an advocacy group for the nonprofit sector, found that underfunded government contracts, slow government payments, redundant audits and excessive oversight have left the majority of human services not-for-profits in New York “financially distressed.”

The report, researched and written by a team of not-for-profit executives, accountants and analysts, comes nearly a year after the large Jewish social service not-for-profit FEGS declared bankruptcy, leaving thousands of employees jobless. The collapse also forced tens of thousands of vulnerable clients to move to new service providers.

“What FEGS did was scare people,” said Allison Sesso, the Human Services Council’s executive director. “We have found that the financial status of the sector was dire.”

According to HSC’s February 24 report, titled “New York Nonprofits in the Aftermath of FEGS: A Call to Action,” more than half of human services not-for-profit groups in New York have three months or less of cash reserves on hand. Larger groups are even less stable than smaller groups.

The report’s analysis dumps nearly all of the blame at the feet of the government agencies that write the contracts on which the human services not-for-profits rely. HSC’s proposals to fix the situation focus heavily on suggested changes to the government contracting process.

Members of the commission that issued the report include UJA-Federation of New York CEO Eric Goldstein and David Rivel, CEO of The Jewish Board, which took on a number of FEGS programs after the group’s collapse.

In the wake of the report, HSC plans to begin to rate city and state agencies’ contracting processes in an effort to share information about contract procurement among human services not-for-profits. The rating system, according to plans laid out in the report, will “help even the playing field” between charities and government agencies.

The implosion of FEGS, which declared bankruptcy in early 2015, has yet to be fully explained. The Forward has reported on rampant mismanagement at the charity, on a for-profit subsidiary that ate more than $70 million of the group’s assets and on large bonuses paid to senior executives.

Yet while the HSC report calls on human services providers to improve their risk analysis and financial reporting procedures, the bulk of its recommendations are directed at government agencies rather than the not-for-profit groups that contract with them.

“The overall fiscal environment for nonprofits is not healthy,” Sesso said.

Among other things, the report recommends that state and city contracts fund more of the not-for-profits’ administrative costs. The report also recommends that government contracts, upon renewal, allow for adjustment for changing costs.

The report also blames low salaries paid to employees of not-for-profits on underfunded government contracts. Though the FEGS collapse prompted the report, it does not mention the high salaries earned by some not-for-profit executives, including leaders at FEGS. Gail Magaliff, FEGS’s final CEO, earned $427,000 a year in base compensation alone.

The report also complains about redundant audits and excessive regulation. “Multiple audits waste money and time,” the report reads. It suggests that government agencies coordinate with one another to combine audits.

Describing the effects of a new New York State law, the report notes that a state agency called the Justice Center is now tasked with investigating reports of abuse of individuals with special needs. According to the report, groups were required to spend heavily to cover staff time for employees who were suspended pending the completion of Justice Center investigations — costs that were not factored into the original contracts. The report calls the regulation “a budget-breaker.”

“We are not at all saying that we are not supportive of oversight,” Sesso said, speaking generally about the report’s recommendations. “What the commission is questioning is whether the current approach with all these layers is doing that job.”

Contact Josh Nathan-Kazis on Twitter @joshnathankazis

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