Introduction
The Federation Employment & Guidance Service (FEGS) was regarded as the largest nonprofit social provider in New York City. The organization had a budget of approximately $ 200 million with up to 1900 employees (Ford, 2015, para. 5). Similarly, FEGS was serving about 135000 individuals every year (Ford, 2015, para. 6). Therefore, the news of its bankruptcy was received with many questions regarding reasons for the closure, specific financial issues, and executive compensation as well as whether the situation could have been avoided with proper financial oversight.
Reasons for FEGS’ Closure
While several reasons have been suggested over time regarding why FEGS decided to close down, this paper will focus on four pertinent issues. Firstly, high executive salaries were regarded as a major contributing factor to the sudden bankruptcy. According to Ford (2015, para. 8), the last CEO, Gail Maglift, who resigned suddenly sometime in 2014, was earning a salary of up to $ 620000, as per the IRS tax documents. This was about six times the average salary that most of the CEOs for human services charities receive.
The second reason often cited that resulted in the sudden closure was the broken government to the nonprofit contracting system. As evidenced in Cerini’s (2017) article, the delayed payment for services by the city and state makes it difficult for the nonprofit social services sector to operate. This is the case because nonprofit economics view these organizations as a subset of private industry with specific short-term and long-term goals for the public good. Achieving this requires restricting the use of surplus revenues, but this could not be achieved with delayed payments. Other reasons that led to the shutdown revolve around “poor financial performance on contracts, contracts that failed to cover their full costs, investments in unsuccessful mission-related ventures and costs associated with excess real estate” as per the 2014 fiscal year report (Harrison, 2020, p.319). Similarly, the fact that FEGS was paying for space that it did not require contributed to its unexpected closure.
Specific Financial Issues
There were several financial issues that eventually culminated in the eventual closure. The first issue relates to inadequate financial systems and revenue cycle management. The former, as argued in Brunner and Smallwood’s (2019) study, “makes it easier to circumvent procedures and delegated authority, which in turn increases the risk of theft and misappropriation of funds” (p. 245). The situation worsens when financial reporting is not covered through proper controls combined with poor quality assurance procedures in place. On the former, it emerged clearly that FEGS was spending more money than it needed. Another pertinent financial issue is inadequate internal audit procedures which failed to identify weaknesses in compliance with documentation, delivery, and billing systems. To illustrate this further, the Office of Medicaid Inspector General (OMIG) finding indicated that they overcharged Medicaid (Brunner, and Smallwood, 2019). More specifically, the agency overcharged Medicaid by $ 21 million from the initial $ 81 million reimbursed to FEGS Home Attendant Services from 2006 to 2009 ((Brunner, and Smallwood, 2019, p.250). According to the OMIG report, there was an overpayment of about $ 14 million from the amount requested in reimbursement.
The last financial issue for consideration is the lack of proper financial reporting and board oversight. For instance, FEGS continued to fund several of its for-profit subsidiaries, such as All-Sector Technolgy, HR Dynamics, and SinglePoint, without considering issues such as time value of money (TVM). TVM could have helped the organization identify investment opportunities as well as make sound decisions about how to spend and where to invest money (Brigham and Houston, 2021). For instance, these entities ended up using much-needed resources, including the investment of up to $ 20 million in the five years leading up to FEGS closure (Cerini, 2017, para. 16). This is a clear case of a lack of proper financial reporting and board oversight.
Executives’ Compensation
In the case of FEGS, it was necessary for the executive to receive compensation under Chapter 11 of the US Bankruptcy Code. The code “permits reorganization under the bankruptcy laws of the United States” (McCormack and Wan, 2019, p. 69). The company is allowed to seek the approval of the court on emergency bonuses as part of a reorganization plan which must specify the amount the executives, as well as creditors, will be paid from the organization’s bankruptcy estate. As for executives, FEGS needed to first disclose the proposed payments to all parties in interest in order to obtain court approval. Similarly, the organization must demonstrate that the compensation is reasonable based on the prevailing circumstances. Therefore, FEGS’ decision to pay executives compensation was in line with its plan of reorganization. All it required was approval from the court, and the fact that there was no objection shows clearly that they adequately disclosed the payment. The idea here is that executives needed to be there to oversee the transfer of some services to other related organizations.
The Need for Greater Financial Oversight
From the outside, FEGS seemed to be doing great, and no one could have suspected there were issues related to finances. In fact, the organization had enough size, which “helped to defer administrative costs; they had a certain level of diversification of revenue streams; they had jumped into the social entrepreneurism area” (Harrison, 2020, p. 315). While everything appeared to be headed in the right direction, financial oversight was necessary because FEGS had a complex structure that required nonprofit accounting and budgeting. This could have been crucial when it came to predicting expenses and allocating the resources needed to meet them. Similarly, the nonprofit budget was necessary to provide oversight regarding the costs incurred and revenue expected as well as monitoring. Similarly, oversight needed to be directed on the several government recoupments to ensure they meet the needs of the people. The organization relied more on government funding which failed to provide the needed support to run FEGS effectively.
How this Scenario Could Have Been Avoided
This scenario could have been avoided had all the board members focused their attention on financial risk management. This was necessary in order to minimize the risk of having the organization sink deep. The board members should have prioritized the issue of risk management as well as ensuring they recruited trustees with relevant experience (Cerini, 2017). In fact, trustees should be responsible for making sure the organization does what it was set up to do.
Similarly, organizations such as FEGS are required to have short-term and long-term planning. While short-term goals would be necessary to ensure FEGS operates effectively, long-term goals have helped shape the direction of the organization. With these goals, the board of directors could have been able to identify functional areas that call for individual action plans to achieve long-term financial stability. In addition to this, continuity planning is also crucial as far as leadership transition is concerned. It is important to note that such transitions are a natural phase and cannot be eschewed – proper planning ensures operations continue even during a crisis.
Managing the Organization
If given the organization to run as it is now, the appropriate decision would be to close it and sell the debtor’s assets to a buyer based on section 363 of the Bankruptcy Code. Section 363 requires the debtor “to demonstrate a substantial business justification for the sale” (McCormack and Wan, 2019, p. 70). The most important reason for initiating the sale process is to maximize value for creditors. Similarly, when choosing the buyer, the focus will be to ensure they have the ability to acquire the necessary regulatory approvals under the relevant state law. Most importantly, the buyer must show commitment to continuing the charitable works. Since there are many groups of clients, including people living with disability, un- or underemployed, and homeless, who rely on FEGS for support, the purchaser must show their intention to provide for these people. The team will also make sure that the public interest is considered during the sale transaction.
In line with the above, the decision to sell will be the best move, considering the fact that the organization does not have enough funding to cover its full costs. The organization cannot survive with the under-funded government contracts to continue providing services that communities and individuals rely on. Similarly, board members currently cannot meet their fiduciary duty of ensuring the organization has the financial resources needed to operate. Since it is not possible to negotiate for full cost recovery, the only option is to sell.
Conclusion
FEGS’s decision to file for bankruptcy elicited many questions, especially from other players in the industry. Several reasons were cited for its closure, among them broken government to the nonprofit contracting system. Similarly, the organization was crippled with a few financial issues, such as inadequate financial systems at the time of closure. While several complaints emerged regarding FEGS’s decision to compensate its executives, no case has been filed to challenge it. Overall, the situation could have been averted had the organization put in place short-term and long-term planning as well as provided greater financial oversight.
References
Brigham, E. F., & Houston, J. F. (2021). Fundamentals of financial management. Cengage Learning.
Harrison, Y. D. (2020). Too Big to Fail: The Case of the Federal Employment and Guidance Services (FEGS) Agency. Journal of Nonprofit Education and Leadership, 10(3), 319-329. Web.
McCormack, G., & Wan, W. Y. (2019). Transplanting Chapter 11 of the US Bankruptcy Code into Singapore’s restructuring and insolvency laws: opportunities and challenges. Journal of Corporate Law Studies, 19(1), 69-104. Web.
Brunner, B. R., & Smallwood, A. M. (2019). Prioritizing public interest in public relations: Public interest relations. Public Relations Inquiry, 8(3), 245-264. Web.
Ford, J. (2015). Accounting snafu forces major charity to shut doors; Clients learn of closure from PIX11 News. PIX11. Web.
Cerini, K. (2017). FEGS: A Lesson for the Sector. Cerini& Associate. Web.