The outcome of our public records saga

[Cross-posted from Blue Mass Group.  Disclosure:  Written on behalf of The Fernald League for the Retarded, Inc.

The Massachusetts Public Records Division in the office of Secretary of the Commonwealth Bill Galvin has denied our appeal seeking records on the administration's plans to renovate the Wrentham Developmental Center.

Let me explain why we think this denial is both a very poor decision by Galvin's office and an indication that the Patrick administration's efforts to close the Fernald Developmental Center may well be in disarray.

The Fernald Center is the nation’s oldest state-run facility for persons with mental retardation.  I’ve been helping the Fernald League, a family-supported, nonprofit organization, in its battle to prevent the  administration from closing the Center, sending most of its residents to Wrentham, at least temporarily, and ultimately privatizing its services.   The League contends that the administration has not taken a number of costs, such as the Wrentham renovations, into account in concluding the state will save money in closing Fernald.

In a letter to me dated November 3, Public Records Supervisor Alan Cote said the Division of Capital Asset Management (DCAM) can withhold the Wrentham records because they relate to a "policy decision" that has still not been finalized.

NOT BEEN FINALIZED?  I thought the Patrick administration had finalized its policy of closing Fernald and transferring most of its residents to the Wrentham facility.  That, in fact, was what Nick D'Alusio, the director at Wrentham, thought as well, when I called him on November 6.

D'Alusio told me that his understanding was that DCAM and the Department of Developmental Services were both on track to renovate two buildings at Wrentham and have them ready to accept as many as 60 Fernald residents by May.  But he acknowleged that the project still hasn't gone out to bid.  The design is complete, he said.  But the bids were supposed to be solicited in September.  The cost of the renovations is reportedly $1.6 million.

As I noted in a previous post, I had filed a request with DCAM on July 9, seeking the feasibility study and a documented cost estimate for the Wrentham renovations.  Under the state's public building construction bidding statutes and policies, those feasibility documents should be completed and approved before the design is done.

But after first writing to tell me I should make an appointment to come in and review the records, Peter Wilson, DCAM deputy general counsel, wrote to me on August 21, denying my request.  Wilson's denial letter cited an exemption to the Public Records law relating to those ongoing policy deliberations.

The exemption, however, says that it does not apply to "resonably completed factual studies or reports."  The same day I received Wilson's denial letter, I also received a letter from DDS Commissioner Elin Howe, stating that bidding on the Wrentham project was scheduled for September, with a contract award scheduled for October.  If that was the case, any feasibility study on the project would have had to be completed by the time Wilson was denying my request.

The Public Records Divsion took more than two months to decide my appeal.  Yet, their attorney never talked to me about the case, never asked for Elin Howe's letter, which I had offered to provide him, and never called D'Alusio or apparently anyone else to verify DCAM's exemption claim.  The Public Records attorney also apparently never asked DCAM for a copy of the feasibility study for the renovations to decide for himself whether it was reasonably complete. 

In his letter to me on Tuesday, Public Records Supervisor Cote stated that Wilson had stated in an October 30 email to his office that there were "ongoing discussions...as to whether 'the building [slated for renovations at Wrentham] can be used’ for the contemplated purpose.”

“That’s totally new to me,” D’Alusio said, when I read him the passage above from Cote’s letter.  “I have no information that there are still discussions over the use of the buildings.”

So, here we are.  It’s already November, with seven months to go until DDS’s announced June deadline of closing Fernald, and six months to go until its announced deadline for having Wrentham ready to receive some 60 Fernald residents.  A design for the renovations is complete; yet, DDS and DCAM have apparently not even decided that the buildings in question at Wrentham can even be used for “the contemplated purpose.”

Meanwhile, DDS is laying off staff at Fernald and letting conditions deteriorate there — a situation which is putting pressure on remaining family members and guardians of the residents to get them out quickly.  No wonder those folks aren’t getting much sleep at night these days.

Tracking the stimulus money

In the name of transparency and accountability, a lot of people are putting a lot of effort into tracking the federal economic stimulus money now flowing into cities and states.

The question is how effective and valuable are the results of those tracking efforts?  Are the federal government and the states getting a real handle on the funding under the economic stimulus bill, also known as the American Recovery and Reinvestment Act of 2009?

In May, the Washington Post reported that the White House supported tracking site, Recovery.gov, was providing little useful information about where the money was going under the program.  Moreover, the reporting requirements on public agencies didn’t extend to the contractor level, according to The Post.   The site now lists contractors, but the results, as noted below, may not always be accurate.

On the other hand, Recovery.org, a privately operated site by Onvia, posts stimulus-related, government bid solicitations, which identify specific stimulus projects in individual states.  This appears to involve much more detailed information than that available on the government site.  To be fair, Onvia, as the Post pointed out, has spent more than a decade developing its search technology.  Recovery.gov is only been around for a few months.

The first quarterly reports from the states are due October 1, and will be posted on the government site.  Under the Recovery Act, states and localities must report quarterly on the use of the funds and provide estimates of the number of jobs created and retained.

I went onto both the federal and the private-sector websites and tried to see for myself what was going on.  I chose my home state of Massachusetts.

As of September 18, 60 stimulus contracts in Massachusetts were displayed on the government’s Recovery.gov website.   I couldn’t find a total for the value of all of those contracts.  In at least one case, something seemed to be wrong.   According to the information displayed on the site, the Columbia Construction Company of Reading, MA, had recieved a $57 million contract from the General Services Administration for a roof replacement of a Veterans Affairs Center in Philadelphia, PA.  The project location was listed as Andover, MA.  Why would a roof replacement of a federal building in Philadelphia be listed as a Massachusetts project and why would it cost that much?

I went to the private-sector, Recovery.org site.

As of September 20, Recovery.org listed 537 projects totalling $1.8 billion in Massachusetts.  There was no listing here of the Philadelphia roof replacement project under Andover, Massachusetts.  However, this site did list a $57 million project to modernize the IRS Service Center in Andover, MA.  The Columbia Construction Company was listed there as the winner of the contract.  That made more sense.  

Recovery.org also lists projects voted by viewers as the most and least worthwhile, and most expensive.  For instance, the most expensive project listed on September 20 was a $270 million project to build a tunnel and building in Alameda and Contra Costa counties in California.  The most unnecessary project was a tiny $7,000 project to purchase solar bus stop signage in Weirton, W. VA.    The second most unnecessary project was a $100 million task order contract to pre-selected contractors to support construction activities in the National Park Service in New Mexico, Oklahoma, and Texas.

Meanwhile, there are other problems in tracking the federal stimulus money that have nothing to do with these two websites.   One of them is that the Single Audit mechanism for state and local governments doesn’t work well in assessing the economic stimulus program, according to the Government Accountability Office.

The Single Audit Act requires state and local governments and nonprofit organizations receiving more than $500,000 in federal awards in a year to obtain an audit.   The GAO reported that Single Audit reporting deadline is too late to provide audit results in time for the audited entity to take action on deficiencies noted in Recovery Act programs.  The GAO recommended that Congress put more money into Single Audit activities.

Clearly, close and accurate tracking of this funding is needed, not only to satisfy the public that the money is being used for the right things, but to help stem the inevitable waste, fraud and abuse.  As of September 2, according to the GAO, the agency had received 80 allegations of fraud and other ethics issues related to stimulus funding that were considered credible enough to warrant further review. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Will government become part of the private sector?

Much of of the current debate over whether government should operate more like private business fails to take into account the growing reality that government is increasingly merging with private business.

Allan Burman at George Mason University maintains that 80 to 85 percent of the federal Energy Department’s workload is done by contract.  As Burman puts it:

Whether it’s cleaning up a nuclear waste site in Washington state or designing a new multi-million dollar scientific device at Oak Ridge, Tennessee, the prime responsibility for getting the job done rests with contractors.

A Government Accountability Office forum report in 2006 noted that the acquisition of goods and services from private contractors consumed over one-fourth of discretionary spending government-wide.  The amount of that federal acquisition spending increased from $235 billion in 2001 to $388 billion in 2005–a 65 percent hike. 

Writer Naomi Klein describes “contract cities” in the U.S., such as Sandy Springs, GA, which has 100,000 residents, and is run by CH2M Hill, an engineering and construction company that received large oversight contracts in Iraq.  Klein maintains that when Sandy Springs was incorporated in 2005, “only four people worked directly for the municipality–everyone else was a contractor.”

Authors such as Elaine Kamark, a former Clinton administration official,  hail “the end of government as we know it” and the New Public Management’s (NPM) call since the early 1990s for the transfer of once governmental functions to private parties and the market.  Others, such as the late Larry Terry, have issued warnings about the dangers of the emergence of the “hollow state.”

Larry Terry, drawing on the work of Milward, Provan, and Else, describes the “hollow state” as a “transfer of power and decentralization of services from the central governments to subnational governments and by extension to third parties.”  He describes the NPM as having introduced “liberation management,” which has called for increased deregulation, and “market-driven management,”  which has called for increased privatization.  Says Terry:

The ideas embodied in both liberaton management and market-driven management, if swallowed whole, may not serve democracy well…There is a great deal at stake, namely the stability of U.S. constitutional democracy.

There’s nothing new about contracting out government services.  Federal policy regarding outsourcing was formalized in 1966 in the then Bureau of the Budget’s Circular A-76.  Among other things, the Circular requires government to classify its work as either “inherently governmental,” which means it cannot be contracted out or as “commercial,” which means it can.

In the July 2008 issue of PA Times (the monthly newspaper of the American Society for Public Administration), Larkin Dudley and Michael DeLor maintain that the definition of ”inherently governmental” remains a difficult question that has not been clarified much since 1966, either in revisions to the circular or the courts.

They note that the Circular states that tasks are inherently governmental if they bind the United States to take some action; determine economic, political, or territorial property by military or diplomatic action, judicial proceedings, or contract management, significantly affect the life, liberty, or property of private persons; or exert ultimate control over the disposition of United States property.

Dudley and DeLor maintain there is a need to think through what activities may significantly affect the life, liberty, or property of private persons.  They contend that government should not outsource when doing so would compromise the mission of an agency, when people are incarcerated, when armed law enforcement is done in public places, for military activities in active war zones, and when government requires taking away freedom or rights from citizens.

It’s not clear to me whether Dudley and DeLor are arguing against the private operation of prisons or even the privatizaton of prison-based services—something that has been done widely in the United States.  Also, do they oppose all use of security contractors in places like Iraq?

Federal regulations also have a lot to say out government outsourcing and when it is or is not appropriate.  Federal Acquisition Regulation subpart 7.5 states that functions considered to be “inherently governmental” include, among others, the command of military forces, the conduct of foreign relations, determining agency policy, determining federal program priorities for budget requests, determining what supplies or services are to be acquired by government, approving contractual documents defining requirements, and ordering changes in contract performance or quantities.

As Dudley and LeLor suggest, it is time for more comprehensive guidelines about the meaning of inherently governmental.  This discussion needs to take place before government slides entirely into the private sector.

Are we letting our government watchdogs become toothless hounds?

Continual downsizing in the federal government since the 1990s may have saved us money in federal salaries, but it has apparently also impaired our ability to track the taxpayer dollars feeding our military contractors.

Consider a July 2008 Government Accountability Office report about another key government watchdog agency, the Defense Contract Audit Agency , which has failed to do its job properly in auditing Defense Department contracts, apparently partly due to downsizing.  According to the detailed GAO report, downsizing has affected not only the DOD’s ability to manage its own growing universe of contractors, but audit staffing within the DCAA itself has been sharply cut in recent years. 

In its report to key members of Congress, the GAO noted that Department of Defense contract management continues to be vulnerable to fraud, waste, abuse, and mismanagement.  The report stated that downsizing of DOD contract oversight staff in the 1990s coupled with hundreds of billions of dollars in increased contract spending since 2000 “has exacerbated the risks associated with DOD contract management.”

The DCAA has a critical oversight mission regarding DOD contracting.  Despite that, auditing staff at DCAA dropped from almost 6,000 in 1989 to 3,500 in 2007, according to the GAO.  That is a 42 percent decline.   DCAA’s 3,500 auditors annually perform about 40,000 audits of approximately 10,000 contractors.

In one office, two DCAA supervisors, who approved and signed 62 of 113 audit reports, said they did not always have time to review audit working papers.  In 18 of those 62 cases, they assigned trainees  to complex forward pricing audits as their first assignments.  

DCAA contract audits are intended to be a key control to help assure that prices paid by the government for needed goods and services are fair and reasonable and that contractors are charging the government in accordance with applicable laws, regulations, and contract terms.   In performing its audits, DCAA states that it follows generally accepted government auditing standards (GAGAS).

GAO opened its investigation after receiving hotline complaints that DCAA was failing to comply with GAGAS on 14 agency audits.  The GAO found that in an audit involving a major areospace company, DCAA management threatened the senior auditor with personnel action if he did not delete findings from the report.  In addition, the management made an up-front agreement with the contractor to limit the scope of work and basis for the audit opinion. 

In another case involving a contractor that produces and supports military satellite sytems, a draft audit report identified six significant deficiencies, one of which led the contactor to overbill the government by $246,000 and another which may have led to $3.5 million in overbillings.  According to the GAO report, two auditors who wrote the draft report were replaced by other auditors who dropped the findings and changed the draft audit opinion from “inadequate,” to “adequate.”  In addition, DCAA managers took actions against staff at two locations, attempting to intimidate auditors, prevent them from speaking with investigators, and creating a generally abusive work environment.  Downsizing alone may not fully explain these issues at DCAA, but it may have been a necessary precondition for them.

The sad fact is that while the Bush adminstration may have hastened the downsizing process, it isn’t solely responsible for it.  One comment on the the Project on Government Oversight blog noted that much of the DOD’s contract management workforce downsizing took place during the Clinton Administration.  In a compelling paper in 2005, Larry Terry at the University of Texas at Dallas  linked government downsizing to the New Public Management (NPM)–a global public-sector reform movement that was embraced by the Clinton administration and implemented by then Vice President Al Gore.  The NPM’s zeal for downsizing was matched only by its enthusiasm for privatization and deregulation.  Terry argued that:

…NPM philosophy and practices have contributed to an increasingly hollow state with thinning administrative institutions.  …thin administrative institutions are fragile.  Fragile institutions lack the integrity and, in turn, the capacity to effectively serve the public good.

It shouldn’t be a surprise that we’ve now arrived at a state of affairs in which we can no longer adequately control the contractors who are increasingly running our government.

A role for nonprofits in the subprime crisis

Nonprofits have come off looking a lot better in the subprime mortgage scandal than their counterparts in the for-profit banking industry and the federal government, says Rick Cohen of The Nonprofit Quarterly. 

Cohen maintains that community development corporations (CDCs) and other nonprofit housing development organizations have been careful not to push new homeowners into risky mortgages.  And while the federal government has largely been interested in protecting investors, nonprofit organizations have been busy, trying to help homeowners in trouble. 

Cohen cites the work already done of groups such as Neighborhood Assistance Corporation of America (NACA), which he contends is “among the most aggressive and most successful national nonprofits engaged in refinancing the mortgages of families facing subprime-induced foreclosures.”  In addition, the Center for American Progress in partnership with Enterprise Community Partners has proposed the Great American Dream Stabilization (GARDNS) Fund, to be capitalized by a $10 billion Community Development Block Grant appropriation.  The fund would be used to help low and moderate-income homeowners purchase foreclosed and abandoned properties.

As a January report on the GARDNS Fund plan by the Center for American Progress notes:

…debating whether subprime borrowers were more at fault than unregulated mortgage companies is no more productive than arguing about whether the negligent camper or the neglected forest clearance practices contributed more to the rapid spread of a wildfire-
the first order of business is putting out the fire before it consumes more homes.

Cohen also suggests in ”How Foundations Can Heal the Housing Crisis,” that nonprofit charitable foundations will have an increasing role to play in financing the rehabilitiation of abandoned properities across the country due to foreclosures.

Foundations can help now before federal money starts flowing, Cohen suggests, by providing grants to municipalities and nonprofits to begin rehabilitating properties and to manage rental units and rebuild neighborhoods.  Cohen maintains that:

now is the time for them (foundations) - and other organizations with vast tax-exempt endowments – to put billions of their dollars to work as a capital base for groups that are trying to stimulate new investments in financially challenged neighborhoods.

Cohen adds that smaller and medium-sized cities, in particular, that have been hit hard by the property-foreclosure crisis, don’t have access to large foundations with “signficant track records in housing and community-development investment.”

Vogel: The business case for corporate responsibility will always be about to be proven

In 2005, David Vogel, a professor at the University of California, Berkeley, wrote a book called The Market for Virtue, which concluded that the corporate social responsibility movement had only a limited potential to bring about significant change in the way companies do business.

In a seminar last week at the Kennedy School of Government, Vogel didn’t change his message much.

Corporate social responsibility (CSR) is alive and well by every possible dimension, he conceded.  There has been an expansion in private codes of ethics; and private, voluntary regulation—so-called soft regulation—has expanded significantly.  It’s all very encouraging, but what does it mean?  Are companies behaving more responsibly?  It’s very difficult to say because the boundaries of what constitutes CSR keep shifting and companies are multifaceted, Vogel maintained.

British Petroleum, for example, has been applauded for addressing climate change issues in its business policies, but has been criticized for oil spills in Alaska, he noted.  Merck has been praised for providing drugs to cure river blindness disease in Africa, yet criticized for marketing Vioxx.  Exxon has an exemplary health and safety compliance record regarding its own employees, but hasn’t been good on global climate issues.

In the financial sector, the subprime loan mess has eclipsed much of the progress made along corporate responsibility indexes.  The fact is that while the risks and opportunities of CSR have become more important to managers in recent years, their importance relative to other business processes have not increased, Vogel argued.  CSR is an “insurance premium” for businesses, rather than a consideration at the core of a business’s processes. 

Yet, Vogel acknowledges, there remains an irresistable attractiveness in the concept of CSR and the belief “that you can make money and make the world a better place.”  The problem, he maintained, is that “the business case for CSR will always be about to be proven, but will never be proven.”

One thing that has changed about CSR is the relative importance advocates place on public policy and government regulation.  In the recent past, there was a view that government had become irrelevant as an actor in the sphere of social responsibility, but that view is now seen as naive and there is an awareness that there are limits to CSR.  Global climate change is an example.  Without government regulation and support, companies are not going to make the investments needed to begin to address that problem, he maintained.

Vogel disagreed with a comment from a member of the audience that CSR initiatives continue to be hampered by the “command and control” nature of government regulation.  “I like command and control,” he said, pointing out that advances since the 1960s in clean air, civil rights, and consumer product safety in this country have been the result of command-and-control government intervention and regulation.

Yet, Vogel was sanguine about the potential for government to resume its former pre-eminent role as a regulator of the corporate sector, arguing that government’s role in that regard constantly fluctuates.   I’m not sure I agree with him there.  It seems that since the Reagan years, there has been a long and steady slide in the political willingness in this country to use government in that command-and-control function.  The trends seem largely to have been downwards, and I’m not sure there’s a clear consensus for a reversal in the foreseeable future.

Performance, accountability, rules, and the Mount Hood-Big Dig dirt case

When I was with the Massachusetts Office of the Inspector General, we reviewed an interesting case in which hundreds of thousands of tons of fill from the ongoing “Big Dig” tunnel project underneath Boston were delivered to Melrose, a small city a few miles to the north.

It was done under an unusual arrangement in which a contractor actually offered to pay the city of Melrose to take the stuff.  The offer was made in April 2000.  City officials estimated they would garner more than $200,000 in revenues from the fill.  The then parks superintendent suggested to the then mayor that they could use the fill to make long-needed improvements to the 12th fairway of the city’s Mount Hood Memorial Park and Golf Course.

The problem was that those city officials failed to first do a project plan, design, or cost estimate.   As the truckloads kept coming, wetlands in the park became flooded and sediment from the fill got into resource areas.  Trees and other vegetation in a number of areas died or were stressed.  A partially installed drainpipe in the fairway failed, resulting in the need to install a new one, and the built-up fairway slopes had to be stabilized.  Rather than completing the project with $200,000 in revenues from the fill, as planned, the project was now projected to cost $1.8 million.  The parks superintendent was fired from his position and the mayor himself left office soon afterwards.

The IG’s office was called in to do an assessement.  We found, among other things, that in six instances, the city procured site preparation and other work without complying with the state’s public works bid law.  In 16 instances, the city failed to comply with a law requiring written contracts. 

I discuss this case and three other “design-build” contracting cases in which traditional bidding rules were bypassed, in an article in the March/April 2008 issue of Public Administration Review.  The purpose of the article is to offer a rebuttal to a view among some public administrators and academics since the 1980s that bidding, contracting and other rules are largely bureaucratic red tape and that they stifle innovation by public managers and hamper their performance.

On the contrary, these cases appear to me to show that there is a certain amount of wisdom inherent in public procurement laws and regulations, and that when managers evade those rules, their projects can implode.  Conversely, when they follow rules, they may well be rewarded with successful and accountable projects.

Public works bidding rules, in particular, require public managers to do a certain amount of up-front planning for their projects in developing their bid requirements.  Contracting laws help protect public entities by ensuring that legal agreements are drafted with private contractors.

In the Mount Hood case, the city of Melrose jumped at the offer to be paid for accepting the Big Dig fill.  Within weeks, the fill began arriving from Boston.  Between May of 2000 and July 2001, roughly 700,000 tons of Big Dig fill were dumped in the center of Mount Hood park.

In the case of the drainpipe installation in Mount Hood’s 12th fairway, the city had hired a contractor for the job without having sought bids as required by the state’s public works bid law.  The law would have required the city to prepare a full set of specifications for the drainpipe installation—in other words the city would have had to do some up-front planning for the job.  The city also failed to execute a contract for the drainpipe work—a violation of another state law requiring that contracts be used in municipal transactions with vendors with values over $5,000.

The drainpipe was partly installed by the contractor in an area of the fairway where peat was present.  According to the IG’s report on the project, portions of the pipe became dislodged when the peat moved, or “heaved,” underneath the drainpipe.  An excavating machine belonging to the contractor became buried in the fairway.  A decision was later made by the city to abandon the pipe and start all over again with a new one.  Not only did the drainage system have to be redesigned, but the city was forced to spend money to pump silt deposits out of nearby wetlands areas.  The silt deposits were found to have been caused by the drainpipe failure.

In the PAR paper, I conclude that in the drainpipe case alone, had the city complied with the bid law and hired an engineering firm to prepare plans and specifications, those plans would have been likely to have been based on existing conditions of the fairway and the presence of peat there, and presumably those conditions would have been disclosed to all of the bidders.  The expensive environmental problems could have been avoided.  Moreover, without a contract in the drainpipe case, the city had no legal means to protect its interests.

Interestingly, the city was not required to seek bids for the overall fill delivery contract because the city was not specifically paying for the fill.  Nevertheless, the city’s lack of plans and specifications for the overal project appears to have had a direct impact on the city’s ability to prevent the environmental problems that occurred.

The lesson here is that to the extent that rules encourage planning for major projects, it’s often a good thing to follow them.

How to Steal from a Nonprofit

Articles should try not to promise more than they actually deliver, and that may be a problem with a piece in the current issue of The Nonprofit Quarterly, titled “How to Steal from a Nonprofit: Who Does It and How to Prevent It.”

The article, written by Janet Greenlee, Mary Fischer, Teresa Gordon, and Elizabeth Keating, asks the following question in the first paragraph: “Is it easier to steal from a nonprofit organization than from a business?”   The article implies that the answer is yes because it states in the following sentence that:

…an atmosphere of trust, the difficulty in verifying certain revenue streams, weaker internal controls, a lack of business and financial expertise, and a reliance on volunteer boards all contribute to increased nonprofit vulnerability.

The problem is that the article never really makes the case that nonprofits are more vulnerable to theft than are for-profit companies, and it doesn’t examine whether nonprofits are particularly hampered by an atmosphere of trust, weaker internal controls etc.  In fact, the article is largely based on a 2005 survey done by the Association of Certified Fraud Examiners (ACFE), which reported that of a sample of 508 cases of occupational fraud, only 58, or 12 percent, occurred in nonprofit organizations.  That actually doesn’t seem to be too bad a record for nonprofits.  Seventy-two percent of the fraud cases occurred in publicly and privately held companies and 16 percent occurred in government agencies.

Greenlee et al. state that the survey found that median losses per incident among nonprofits were actually similar to the losses suffered by businesses (though they were significantly higher than those suffered by government).  Also, they note that both payroll and check tampering fraud were more common in the nonprofit sector than in the business sector, while false invoices and skimming from revenues were more common in for-profit entities.  Thus, the comparison of the levels of stealing in nonprofit versus the for-profit spheres  sounds like a bit of a wash.  The authors further note that the sample size is too small to draw firm conclusions about fraud in the nonprofit sector.

The article does provide some helpful information about the common types of fraud perpetrated on nonprofit organizations and ways to prevent it.  For instance, the authors note that the survey found that the typical nonprofit fraud case was committed by a female with no criminal record.  She earned less than $50,000 a year and had worked for the nonprofit for at least three years.  

According to the article, more than 25 percent of the reported nonprofit frauds were conducted by managers, while 9 percent of the perpetrators were executives.  What about the remaining 66 percent?  Were they administrative staff, direct-care workers?  The article doesn’t say.

The authors state that there are three types of occupational fraud: asset misappropriation, corruption, and financial statement fraud, with asset misappropriation accounting for the vast majority of all reported frauds.  The article doesn’t define corruption, which would be helpful here.  It defines asset misappropriation as involving cash skimming, larceny, and fraudulent disbursements.  Fraudulent disbursements include inflaton of invoices, overstating hours worked, and falsifying claims for expenses.

As the article notes, fraudulent financial statements were a major feature of the Enron and Worldcom scandals in the private sector.  Those scandals led to the passage in 2002 of the Sarbanes-Oxley Act, which was intended to curb those abuses.

Citing the ACFE survey, the authors state that contrary to what some might believe, it was relatively rare for fraud to be discovered by the audit process.  They state that 43 percent of the frauds were detected by tips, 25 percent through internal audits, 12 percent through external audits, and 22 percent “by accident.”  Actually, the internal and external audits together detected 37 percent of the frauds, which isn’t all that far behind the fraud detection record for tips.

The authors suggest that to prevent stealing from nonprofits, every organization needs property insurance and, depending on size, may also need to buy employee dishonesty coverage.  For this coverage, insurance companies may require that a nonprofit’s bank accounts are reconciled by someone not authorized to deposit or withdraw.  In addition, they state, officers and employees should be required to take annual vacations of at least five consecutive business days (financial personnel who don’t take vacations is a red flag for possible fraud) or the organization should be required to have an annual audit.

Fraud, however, is not the only employee-perpetrated financial problem that nonprofits, in particular, are subject to.  There is also waste and abuse—activities which don’t necessarily rise to the level of fraud, but which may cause even greater financial losses.  For instance, nonprofits are often involved in transactions with nondisclosed related parties—transactions that can secretly benefit relatives, friends and business associates of the executives of the nonprofits.  Executives of nonprofits are also sometimes known for using organization funds to buy expensive personal cars, take unnecesssary trips etc. 

A more comprehensive article on how to steal from a nonprofit might also examine whether there are different levels of fraud between nonprofits that primarily depend on government revenues and those that don’t.  It would also be helpful to have an article that considers the questions suggested in the first paragraph of this NPQ article:  do nonprofits really have weaker internal controls than for-profit businesses; do nonprofits have less financial expertise than their business counterparts; and do volunteer boards exercise less financial control and oversight than do paid boards?  Who knows, the answers to those questions might be surprising.

Remaking the United Way

Major scandals can cause the implosion and disappearance of a company or organization—Enron and Worldcom are examples—or else, once scandal-plagued entities can emerge reformed and remade.  Fannie Mae and Freddie Mac are examples of the latter. 

In the nonprofit sector, the United Way might be seen as an example of an organization that has been trying to emerge remade and reformed from numerous scandals. 

The question Rick Cohen asks in an article in the Nonprofit Quarterly is whether the United Way today is “on the cusp of rebirth, or is it in the death throes?”  The United Way of course is a collection of individual agencies around the country, which operate semi-autonomously under an umbrella organization, the United Way of America.  Scandals seem to have hit a great many of these individual agencies, starting in the 1990s.

Cohen cites many of the cases:  William Aramony’s theft of $600,000 “to support a high-flying lifestyle and various paramours.”  Oral Suer’s and Norman Taylor’s mismanagement of the United Way in metropolitan Washington, D.C.;  and Jacquelyn Allen-McGregor’s embezzlement of nearly $2 million from the Capital Area United Way in East Lansing, Michigan, while she was the vice president of the organization.  And Cohen notes that the United Way has faced serious criticism of its accounting practices, including revelations in 2002 and 2003 that United Ways in several cities had inflated their fundraising totals by double counting the numbers.  As Cohen notes:

The image of a United Way system hobbled by widespread accountability and ethical problems has been difficult for nonoffending United Ways to shake.

That perception coupled with various economic and demographic changes have significantly dampened the United Way’s fundraising ability since the 1990s.  As a result, United Ways around the country have been trying to modernize themselves, and have turned to the latest business and governmental management models to do so.

A major thrust has been the “Community Impact Agenda,” implemented by United Way of America President Brian Gallaher, which reflects a strategy of focusing larger and longer grants toward a small range of “priority issues,” Cohen says.   Borrowing the terms of those management models, the new United Way approach places a focus on “results” and “performance.”

One of those results has been that the former staples of United Way funding—the “core” agencies, such as the Salvation Army, Volunteers of America, the Boys & Girls Clubs of America, and the YMCA and WYCA—are losing United Way funding, “in part because their broad missions might not align with emerging local priorities in the action agenda.” 

Cohen maintains that United Way agencies around the country now talk of addressing “root causes” of social problems, which are often identified through community surveys.  He maintains, though, that by addressing root causes, it appears that some agencies “are simply refocusing attention on intervention points that make sense.”  In Battle Creek, Michigan, for instance,  the United Way discovered that teenage pregnancy was positively correlated with the problem of illiteracy.  This prompted a shift in funds into programs that focused on literacy skills.

Meanwhile, United Ways themselves are finding that their traditional sources of revenues are changing as well.  Cohen points out that despite the generosity of workplace givers, participation rates of federal employees through payroll deduction have declined significantly, from 47.9 percent of solicited federal employees in 1993 to 31 percent in the most recent campaign results.  To replace these declining workplace revenues, the United Way system has had to find alternatives by tapping institutional donors to replace workplace donors. 

Cohen doesn’t venture a prediction as to whether the United Way’s new management approaches will work in the long run.  The United Way may prove an interesting test case as to whether a major nonprofit institution can indeed reinvent itself. 

 

Fernald and the folly of unchecked privatization

A bitter battle over privatization is being fought in federal court in Massachusetts.  It’s one that has garnered little substantive media coverage in the state, yet it promises to have lasting consequences for the care of some of the most vulnerable members of society and for the role of government itself in this state. 

The battle is over the fate of the Fernald Developmental Center in Waltham, Massachusetts, the nation’s oldest, state-run facility for persons with mental retardation.  The administration of Gov. Deval Patrick, which is seeking to carry out the former Romney administration’s plans to close Fernald and privatize its services, is appealing  U.S. District Court Judge Joseph Tauro’s ruling last year that Fernald must stay open to its current residents.  

By way of disclosure, I have been working as a consultant to The Fernald League for the Mentally Retarded, Inc., a nonprofit, family-run organization seeking to keep Fernald open.   However, I’ve written this and a previous entry, about how the Patrick administration has politicized Fernald cost-benefit numbers, on my own volition.

I think it’s important to know what’s at stake here and what the state is potentially giving up in closing an institution such as Fernald and very likely the five other remaining state facilities in Massachusetts for persons with mental retardation.  (Administration officials insist they have no plans right now to close any facility other than Fernald, but I think it’s unlikely they would be underaking the expense of this legal battle in the U.S. Court of Appeals if they didn’t have ambitions to close other state facilities as well.)

Here’s what the state and its citizens and taxpayers will be losing if the Patrick administration wins its appeal:

1.  They will lose a long-held state asset—190 acres of land and buildings—in exchange for one-time revenues from developers purchasing the property.  The Department of Mental Retardation has already signed 20-year agreements with a contractor to lease homes in the community for some of the transferred Fernald residents.  The state will not own those properties even though it will be paying up to $2 million per home over the 20-year period. 

I should note that the Fernald League does not oppose the sell-off and development of most of the Fernald Center campus, and has proposed a “postage-stamp” arrangement under which the current residents would remain in a smaller, designated section of the grounds.  The Patrick administration, however, has declined all offers to negotiate such an arrangement.

2.  They will lose a source of high-quality state-operated care for persons with mental retardation.  This care will ultimately be assumed by contractors, who are more interested in preserving their bottom lines.  This is evidenced by the fact that levels of staffing in community-based, privatized group homes are lower than in state facilities such as Fernald, and by and large community-based staff have little or no health care benefits.

It is this lower level of staffing and lower levels of pay and benefits that are driving the administration’s assertions that the state will save money in closing Fernald.  The problem is that facilities such as Fernald serve individuals with the most severe and profound levels of mental retardation and extensive medical needs in the state.  These people don’t represent the average population in the DMR system, who, by and large, have more mild to moderate levels of mental retardation.  And yet the administration insists, without any explanation, that when these fragile Fernald residents are transferred to the community, they will receive equal or better care there.

 3. They will lose the ability to oversee the care and services provided by the DMR.  In a brief filed in 2006 in the federal court case over Fernald, the Wrentham Association, a plaintiff in the case, noted that DMR’s oversight of the community system is inadequate and relies largely on consumer satisfaction surveys and reviews whose reports are not available until long after the data have been collected.

In addition to eroding the ability of the state to oversee care provided in thousands of community residences, the spread-out community system erodes families’ ability to organize and advocate effectively for their loved ones.  DMR officials have shown that they understand the power of this advocacy.  When families of DMR clients have gotten together to hold DMR to account for its treatment those clients, DMR officials have threatened to evict those clients from their residences and split the families apart.

In its notice of appeal last September in the Fernald case, the Patrick administration stated that the decision to close Fernald is:

…consistent with a national shift away from institutional care in favor of community living.  Decades of research indicate that community settings offer people with mental retardation the best care available and the highest quality of life. 

The first sentence of this statement is true, and the second is false.  It’s true that there has been a national shift away from institutional care in the past three decades.  In state after state, families of residents of state-fun facilities have been fighting uphill battles to save them.  What is false is that the privatized alternative to the facilities provides the best care available and the highest quality of life.

In Massachusetts, the 2006 legal brief filed by the Wrentham Association detailed a privatized system of community-based care in Massachusetts that is at the “breaking point.”  Levels of physical and sexual abuse, medication errors, and outright neglect were far higher in the privatized community system on a per-resident basis than in the state facility system, the brief stated.

It is patently false, therefore, to say that community settings provide the best care available or the highest quality of life.  If that was the case, families of residents in institutions would be clamoring to get those residents out of the facilities and into the community settings.  Instead, they’re fighting to keep them in.  This has forced the privatization proponents to adopt the condescending position that these families don’t know what’s best for their own loved ones.

In June 2007, a Boston Globe editorial, headlined “The Folly of Closing Fernald,” called on the Patrick administration to “stop sparring with a judge (Tauro) whose rulings are consistently in the best interest of the Fernald residents,” and craft “a solution that makes economic and therapeutic sense.”  The administration, however, has chosen not to follow either of these pieces of advice.

Simply because a practice or governmental policy has become a trend doesn’t make it inherently good or right.  As the Globe stated, “deinstitutionalization is not the right remedy for every man and woman with mental retardation, despite the assertions of advocates for group homes.”

In Latin America, country after country have been reversing the privatization trend in recent years, recognizing the economic demage that privatization and deregulation have inflicted on their economies since the 1970s.  Is there really agreement in this country that privatizaton and deinstitutionalization have been uniformly good things?