Review: Nonprofits do business with execs
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Numerous Long Island nonprofits do business with their board members, executives and officers' family members, raising questions about how these charitable organizations are spending donor -- and often taxpayer -- money.
The transactions -- self-reported in federal tax filings -- are the focus of scrutiny in Albany, where legislators, regulators and officials are considering reforms for the state's multibillion-dollar nonprofit sector.
A committee formed by state Attorney General Eric Schneiderman's office issued a report earlier this year calling for more oversight of business dealings between nonprofits and their leadership, along with changes that would make it easier for prosecutors to challenge such transactions in court.
State Sen. Carl Marcellino (R-Syosset) is sponsoring legislation that would enact many of the report's recommendations. His proposal would, among other provisions, require nonprofit boards to consider alternatives before doing business with a board member or executive. A second bill he is sponsoring would make it harder for nonprofits to hire executives' relatives by requiring two-thirds of an organization's board to approve such a move.
"We want to make sure nobody gains playing the system," he said. "Obviously you're not going to make decisions in the best interest of the public if you have a conflict. . . . We want the public's interest to be first and foremost always."
Deals can help groups
Some business transactions involving people connected with an organization are made with the best of intentions and can benefit nonprofits, experts said. And many appear to be benevolent gestures from board members to help an organization during tough economic times. State and federal law does not bar an organization from paying an executive or board member for services, nor does it bar nonprofits from hiring members' relatives for key posts.
"Reporting something doesn't necessarily mean it's a problem," said Michael Cooney, a partner at Nixon Peabody, a major law firm with offices around the world and Long Island that represents nonprofits. "You may have a situation where the best and most reasonable approach is to have a contract with someone you know. That's how business gets done generally."
At United Way of New York State, a board member would have to leave if he or she wanted to do business with the nonprofit, said Susan Hager, the organization's president.
Otherwise, she said, "The appearance to the public and the donors is that, in order to be a vendor of this organization, you have to be on the board. It may be an unfair assessment in each of these cases, but that's the risk they run in allowing that to happen."
Newsday reviewed about 1,700 tax filings for nonprofits on Long Island to determine what kind of transactions organizations are reporting. Nonprofits are required to report contracts, loans, employment agreements or other transactions with "interested persons" in annual filings with the Internal Revenue Service. "Interested persons" under IRS guidelines include current or former board members, key employees, executives' relatives and those "in a position to exercise substantial influence over the affairs" of a nonprofit. The filings reviewed were for organizations with more than $100,000 in annual revenue.
At least 170 -- about 10 percent -- of the public charities reported transactions with interested persons. These organizations ranged from a large university to a small nonprofit formed by a felon who once stood trial with a prominent member of the Gambino crime family. Those transactions reported included a seven-figure construction contract with a board member's company, employment of a key official's three close relatives, and loans from nonprofits to board members.
Experts say such relationships between nonprofits and their leadership can call into question how donor and taxpayer funds are being spent. Newsday's review also highlights an issue that nonprofit watchdogs see statewide and across the country: There isn't enough oversight of the nonprofit sector, which ballooned in New York State from about 36,000 registered public charities in 1995 to nearly 64,000 today.
"Government is overwhelmed when it comes to monitoring nonprofit programs," said Ken Berger, president and chief executive of Charity Navigator, a nationwide nonprofit watchdog that evaluates organizations based on finances, accountability and transparency.
Public charities increase
There were about 4,000 registered public charities on Long Island in 1995 compared to more than 7,600 in 2011, according to data from the National Center for Charitable Statistics, a Washington, D.C.-based repository of data on the nonprofit sector.
"Given the resources of the bureau, they can't look at all of those filings," said Sean Delany, former head of the New York State attorney general's charities bureau, the state's top nonprofit watchdog.
Civil law bars nonprofits in New York from making a loan to a board member or officer. However, at least 11 Long Island nonprofits had such a loan outstanding as of the most recent tax filings.
One of the organizations with a loan to a board member, the St. James-based Coalition Against Breast Cancer, is already the subject of the state's scrutiny. Last June, the state attorney general's office sued the group, accusing it of misusing charitable dollars. The attorney general also alleged that two of the nonprofit's board members received illegal loans from the organization. Those loans -- for $105,000 and $50,000 -- were included in the organization's tax filings.
The organization didn't have a lawyer at the time those loans were made, said Randy Friedberg, the attorney representing the coalition and its board members.
"To the extent they were doing anything that might now appear wrong, they didn't know it," Friedberg said. The loans have since been repaid, he said.
Board chief gets loan
Another organization that made a loan to a board member was the Hewlett-based Bless the Kids Fund Inc., which also operated as the Bless the Kids Foundation. In 2009, that nonprofit loaned $10,400 to the board president, according to that year's tax filing.
The tax filing was signed by board vice president Mark Lomonaco of Ozone Park, who pleaded guilty in 2001 in federal court to racketeering and other charges for his role in helping control the Queens scrap metal business, court filings and other records show. Lomonaco's co-defendant was Carmine Agnello, the former son-in-law of John Gotti.
In 2002, Lomonaco was sentenced to 5 years in prison and 3 years of supervised release. He got out in 2006, records show. Months after his release, Lomonaco helped found Bless the Kids, according to the nonprofit's certificate of incorporation. Bless the Kids sold donated cars for scrap metal and used the funds to make donations to other charities, according to the group's tax filings.
In 2009, the year of the loan to the board president, Bless the Kids had a $546,145 budget. Of that, $37,510 went to grants or donations, nearly $148,000 went to advertising and promotion, and $319,722 went to other expenses, tax filings show.
In a brief phone interview, Lomonaco said the nonprofit closed under pressure from the state attorney general's office, adding that the board president paid back the loan before the organization folded.
Asked about his criminal past, Lomonaco cut off the conversation and said his lawyer would call a reporter. No lawyer called, and additional attempts to reach Lomonaco were unsuccessful.
Quality Services Beyond Compliance -- a Medicaid-funded social service provider with headquarters in Hempstead -- had $118,483 in loans to its director Gershon Clarke at the end of fiscal year 2011, records show. The organization is listed on the state Office for People With Developmental Disabilities' website as a Medicaid service coordinator. Almost all of the organization's $670,455 in revenue in 2011 came from Medicaid.
Clarke, who records show made $143,196 in salary and benefits in 2011, said he needed to research the issue before commenting. He did not return subsequent calls.
Federal, state oversight
There are two main watchdogs overseeing nonprofits. The IRS monitors the sector to ensure organizations comply with federal laws governing nonprofits. The state attorney general's office looks for compliance with the state's Not-For-Profit Corporation laws.
Both state and federal laws have few requirements or prohibitions when it comes to business transactions between a nonprofit and those connected to the organization. Neither requires nonprofits to put contracts out to bid, bar board members from taking part in votes that could impact their own contracts, nor prohibit organizations from hiring executives' relatives.
Even without explicit language, the IRS and state attorney general's office have been able to go after nonprofits they say misuse funds. For example, the IRS can require repayment and levy penalties if it finds a nonprofit unjustly enriched someone in a position to influence the organization. In addition, the state attorney general's office can go to court to block payouts and sue to recover money if a nonprofit director breaches his or her fiduciary duty.
Of the 170 nonprofits that had deals involving a board member or other person connected with the organization, 69 reported a contract or payment arrangement.
Official's firm gets contract
When the Independent Group Home Living Program, a Manorville-based nonprofit that provides taxpayer-funded programs for the developmentally disabled, needed transmissions repaired, it turned to a company owned by its board president, Konrad Kuhn. From 2008 through 2010, Kuhn's company, Star-Lite Transmissions Inc., received $57,188 for automotive repair work from the nonprofit, tax filings show.
The nonprofit paid Star-Lite between $3,550 and $3,939 for four transmission repairs in 2010, according to invoices the organization let Newsday review.
Walter Stockton, the chief executive, said the number of replacements is not surprising given the size of the fleet. The nonprofit has about 125 vehicles that put on as much as 90,000 miles a year transporting residents and program participants, he said.
From 2008 through 2010, Kuhn's colleague on the board, Eugene Gerrard, got $37,376 in work for his company, St. Gerard Printing, to put together the nonprofit's annual report and bimonthly newsletter. Neither Kuhn's nor Gerrard's work was put out to bid, Stockton said. In addition, board vice president Bruce Fuhrmann's company, Swezey Fuel, received $815,070 for providing home heating fuel to the organization's 55 homes. That work was also not competitively bid.
Fuhrmann said he provided fuel to the organization for at least a decade and little if any of the money was profit.
"In that $815,000, over 90 percent of that would be our cost of buying fuel oil," Fuhrmann said. "I made no money in that 10 years. It was kind of a courtesy."
Stockton said the nonprofit has done business with some board members for years and didn't feel bids were necessary.
While state law does not require such work to be put out to bid, as of January, Independent Group Home Living requires competitive bids for services over $2,500. The group put the heating oil and printing contracts out to bid this year. As a result, the nonprofit hired two new vendors whose bids were lower than those submitted by the board members' companies.
The largest no-bid contract Newsday found was the $1.9 million the YMCA of Long Island gave to Paramount Development Associates to build the 6,500-square-foot Martone Children's Center. The head of that company, Joseph Graziose Sr., served on the Glen Cove branch board. Graziose has since died. Calls to his company were not returned.
Peter Mastaglio, chairman of the organization's board of trustees, said there are benefits to hiring someone you trust.
"We give it to people we know and respect," he said. The branch board on which Graziose sat made the recommendation to hire Paramount, Mastaglio said. The ultimate decision, however, was made by a higher board on which he did not sit.
The price was in line with project architect James O'Grady Architects' construction cost estimates, he said.
More than 20 Long Island nonprofits reported employing the relative of a key official such as the spouse or child of a trustee.
At LIU Brooklyn, the campus provost, Gale Stevens Haynes, has three relatives on the payroll, records show. Haynes' daughter, an information technology professional, made $98,834 in 2010; her sister-in-law, who runs a program for low-income students, made $119,240; and her son-in-law, an associate provost, made $154,242, according to the tax filings, which describe the relationships, and information on the school's website.
The wife of Paul Forestell, the LIU Post provost, is a deputy chief information officer at that campus. She made $100,438 in 2010. The daughter of Jeffrey Kane, vice president of academic affairs, made $48,675. She no longer works for the school.
A university spokeswoman, Kimberly Volpe-Casalino, declined to provide information on the employees. The officials involved and their relatives either declined to comment or did not return calls. The university wouldn't say if the jobs were advertised or if there were other applicants.
Volpe-Casalino did provide a statement:
"The chairman of LIU's board and other members of the Compensation Committee (the trustee subcommittee that focuses on such matters) reviewed the details of the relationships carefully. Where there was a potential conflict of interest, probing questions about the history and nature of each relationship were asked and answered thoroughly and transparently. The committee concluded that it was fully satisfied that there were no conflicts of interest . . . All of the employees are highly qualified, and none of them report to the relatives listed on the 990 form."
Nonprofits get loans
Another category of transactions were loans to nonprofits from persons connected to the organization. At least 68 Long Island nonprofits received such a loan.
Many appear to be benevolent gestures from volunteer board members to help an organization. The North Shore Land Alliance, for example, reported that two board members each loaned the nonprofit $75,000 in 2009.
The loans came near the end of the year with the organization trying to close a deal for 25 acres near Old Brookville it wanted to preserve, said Lisa Ott, the alliance's president and executive director. The money was the final chunk needed to finish the deal. Both loans carried no interest, and one donor later forgave the debt -- effectively converting his loan into a donation, she said.
Some loans reviewed by Newsday carried interest and stand to bring the lenders a return.
For example, seven board members at Lawrence Woodmere Academy, a private prep school in Woodmere, made a $1.9 million loan to the school during 2009 and 2010. The loan, which comes due next year, carries an interest rate of 10 percent per year, the records show. The school hasn't paid any interest, which is not compounding and is due when the loan matures.
Peter Boneparth, the board president, said the loan was made during the recession, when the school was struggling financially and couldn't get financing from banks.
"There was really nowhere else to turn," said Boneparth, who personally financed $1 million of the loan.
Real estate experts contacted by Newsday confirmed such loans are hard to get from traditional financing sources. The interest rate "doesn't seem out of line," said Tom Fink, senior vice president and managing director of Trepp Llc, a real estate analysis firm.
The board loan was secured with a commercial mortgage filed in February 2010, property records show. Boneparth said that was to ensure board members could get their money plus interest in the event the bank foreclosed on the school's first mortgage and sold the property.
He also said he expects most of the board members will forgive the loan when it comes due, although none have officially done so. A school official said Boneparth has forgiven one year of interest so far.
STATE SCRUTINY ON NONPROFITS
New York State legislators and officials have been looking at reforming some aspects of the state's nonprofit sector.
THE ATTORNEY GENERAL
State Attorney General Eric Schneiderman formed a task force last year to look at reforming the sector. That group issued a report in February calling for numerous changes, including increased oversight and limits on executive compensation and transactions involving persons connected to a nonprofit.
Sen. Carl Marcellino (R-Syosset) is co-sponsoring legislation that would enact many of the task force's recommendations. The bill would require nonprofit boards to consider alternatives before doing business with someone connected to the organization. Nonprofits would also need to adopt a conflict-of-interest policy. The bill has yet to find an Assembly sponsor.
Last month, the agencies under Gov. Andrew M. Cuomo's control released new rules aimed at limiting the amount of taxpayer money that can go to pay salaries for top people at state service providers - both for-profit and nonprofit -- to $199,000 annually.