Nonprofit leaders express dismay at lack of federal oversight
By Sam Bishop
Fairbanks News-Miner (Alaska)
March 25, 2007
WASHINGTON — Leaders in several Fairbanks nonprofit groups say recordkeeping rules for federal grants are stringent, but some also say that federal oversight of compliance with those rules is not fail-safe.
The sometimes spotty oversight may have left an opening through which, if federal prosecutors are correct, managers of the LOVE Social Services mentoring program poured at least $450,000 into personal and church expenses. The money came from about $2.9 million that Sen. Ted Stevens earmarked for the after-school mentoring and tutoring program between 2000 and 2004.
Leaders of several nonprofits who run their operations at least in part on federal grants say they are amazed and appalled that the alleged misuse of the LOVE Social Services money went undetected for so long.
“When a nonprofit is highlighted like that, the rest of us cringe,” said Coleen Turner, executive director of the Resource Center for Parents and Children, which uses about $1.5 million annually of mostly federal money passed through the state.
Views of oversight
Some critics of earmarking have said federal agencies do not police congressionally directed grants as tightly as the grants the agencies distribute using their own competitive procedures. An “earmark,” in this case, is language in a congressional act or committee report that directs money to a specific organization rather than a government agency or general area of government enterprise.
Congress, even when it earmarks money, leaves it to the federal agencies to deliver the money. Whether the money is earmarked money or not, people in the nonprofit industry say the accompanying federal agency rules do not vary. Some add, though, that federal program officers don’t, or can’t, always watch closely. In addition, if the federal agency isn’t involved in selecting the grantee, as occurs with earmarked funds, fundamental problems may escape the agency’s notice, they say.
“It’s not competitive, so they can’t rank and score you compared to someone sitting next to you,” said Chuck Barber of Grant Results Alaska in Eagle River. He has worked on both earmarked and non-earmarked grants in Alaska for the past decade.
Ultimately, the Resource Center’s Turner said, the nonprofit groups themselves must create transparent, financially responsible operations.
“It starts with internal control,” she said. “It’s not just from the federal level down.”
Documents show that LOVE Social Services complied with many of the reporting requirements as it received five grants, two routed through the Department of Housing and Urban Development and three through the U.S. Department of Justice’s Office of Juvenile Justice and Delinquency Prevention.
The organization filed detailed budgets projecting its expenses. It filed one-page financial summaries of its total expenditures quarterly or semiannually. It filed reports about its activities and the number of youths served, also semiannually.
White House Office of Management and Budget guidelines state that independent audits are not required from grant recipients unless they spend more than $500,000 of federal money in a year. Prior to 2003, the threshold was $300,000.
Financial documents show that LOVE Social Services’ federal grant spending exceeded the audit threshold three years. It spent $627,000 in 2001 as it set up its program and bought a building from Lily of the Valley Church of Christ in God. It spent $320,100 in 2002 and $355,700 in 2003. Federal agencies do not appear to have audits from the nonprofit on file for any of those years, though. Expenditures in subsequent years apparently stayed below the thresholds.
An employee at the Fairbanks accounting firm that LOVE Social Services used for its financial reports declined to answer questions about the nonprofit, saying the firm — David Stephenson CPA — does not comment about its clients.
The quarterly federal reporting forms submitted by LOVE Social Services do not require any financial details beyond the amounts of money drawn on the grant accounts and the dates on which the draws occurred.
That’s standard, said Barber, of Grant Results Alaska.
“The actual reports from OJJDP, or from pretty much any federal agency, are pretty minimal,” he said.
That doesn’t mean nonprofits can avoid record-keeping, though. “You’re supposed to maintain the backup” to justify expenditures, he said.
The terms of the Justice Department grants require that LOVE Social Services allow the government to “examine all records, books, papers, or documents related to the grant.” The OMB guidelines also state that “records must be available for review or audit” by government officials.
“You really do have to stay on top of all the requirements,” said Samantha Castle-Kirstein, executive director of the Fairbanks Community Food Bank.
Doing so eats time, money and even physical space, though. The food bank receives about 600,000 pounds of material annually from the federal Commodity Supplemental Food Program, Castle-Kirstein said. The food, much of which is sent on pallets to villages, comes with a $30,000 grant, passed through the state, for boxing and warehousing costs.
“We have to know where every can of green beans is today. It’s right down to the individual can level,” Castle-Kirstein said.
Taber Rehbaum, executive director of Big Brothers-Big Sisters of Fairbanks, said the federal requirements are substantial.
“I totally believe in accountability, but we had to get a whole other file cabinet” to handle the paperwork for a recent $50,000 non-earmarked federal grant, she said.
The Food Bank, Big Brothers-Big Sisters and the Resource Center also all hire accountants to conduct annual audits.
“Our audits can cost up to $20,000. It’s significant,” Turner said.
For some, the audits are required by federal and state rules. Other nonprofit groups, such as the Literacy Council of Alaska, don’t hit the spending thresholds that trigger the audit requirements.
Mike Donaldson, the Literacy Council’s executive director, said his organization does them anyway but only once every two years.
“The cost of an audit has just gone up and up,” he said.
Barber, with Grant Results Alaska, said that satisfying independent auditors is the best way for nonprofits to keep up with federal record-keeping. Even the audit system can be manipulated, though, he said. A nonprofit can decline to accept or acknowledge an audit if it doesn’t like the results.
“You can do that three or four times until you find someone” who clears you, he said. Of course, “you have to pay for it each time,” he said, so it’s an expensive game to play.
Other safety steps
Nonprofit groups have other ways to make sure their money isn’t misused, too. Donaldson, of the Literacy Council, and Turner, of the Resource Center, both noted that their rules don’t allow bookkeepers to open the mail. That keeps a bookkeeper from doctoring or hiding bank statements, Donaldson said.
Turner said her organization requires formal purchase orders and two signers on checks. She can’t sign her own paychecks or reimbursement checks. Barber and Turner also mentioned the oversight provided by local board members.
“If there’s anything slightly objectionable, they’ll resign from the board,” Barber said.
It appears that federal agencies expected LOVE Social Services to establish these sorts of procedures.
Chris Hayes and Don Thomas, two of the founding members of LOVE Social Services, each signed, on March 26, 2002, a 16-point terms of agreement with the Justice Department to begin receiving the grant funds. No. 5 on that list said they certified that LOVE Social Services “will establish safeguards to prohibit employees from using their positions for a purpose that is or gives the appearance of being motivated by a desire for private gain for themselves or others, particularly those with whom they have family, business or other ties.”
Barber said he believes some nonprofits linked closely with church groups are at higher risk for financial problems because clergy-directed organizations don’t always have a tradition of transparency. LOVE Social Service’s founders, board members and several staff members are involved with the Lily of the Valley Church, which also sold the nonprofit its building. Several staff and board members also are related.
“That’s sort of a closely held corporation and functioning as a subsidiary,” Barber said.
The federal indictment says Jim and Chris Hayes concealed their family relationships from the agencies, but neither the relationships nor the church purchase were any secret to Stevens and many Fairbanksans. The purchase of the old church was clearly stated in the first application to acquire the money from the earmark in the HUD budget.
“My memory is that that was part of the plan, to take that old church and use it to become the center for these children,” Stevens said in a March 1 interview.
Such connections may have escaped the notice of the federal program officers overseeing the grants, though.
“The staff, the program officers, are overwhelmed,” Barber said. “They tell me that they have 120, 150 grants (each).”
Most program officers are good at what they do, he said. “When they actually sit down and look at reports, they offer a lot of scrutiny,” he said. “But it is for short periods of time.”
Sam Bishop ended his employment with the News-Miner on March 14.
Rehbaum, with Big Brothers-Big Sisters of Fairbanks, said she has been happy with her interaction with grant monitors.
“Our experience has been that we have worked very closely with the federal program officers as far as budgeting, and as far as having any budget revisions approved,” she said.
The group, which helps responsible adults befriend and act as mentors for kids, received its $50,000 grant from the federal Department of Health and Human Services. It won the grant through a competitive process. A federal program officer in Washington, D.C., oversees the grant.
“As busy as he’s been, our grant officer has answered questions, planned trainings” and helped work with other organizations, Rehbaum said. “I can’t say enough about the oversight.”
Sam Bishop ended his employment with the News-Miner on March 14.
