FEGS Bankruptcy Filing Reveals Depth Of Financial Free Fall
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FEGS Bankruptcy Filing Reveals Depth Of Financial Free Fall

Court documents show vast majority of agency programs losing money, CFO revolving door, ballooning overhead.

By the time executives of FEGS Health and Human Services system became aware last November of the massive financial crisis they were facing, a “top down analysis” by a new management team and restructuring consultants revealed that 74 percent of its more than 350 programs were losing money.

Compounding its financial problem was the fact that FEGS recently lost key employees — including three chief financial officers in just two years.

Although FEGS first experienced a major financial loss in 2013 of $5.5 million, that fact was apparently masked by a $4.5 million insurance settlement and gains at some of its affiliates.

When the magnitude of its 2014 loss — $19.4 million — was realized, FEGS announced it was closing and sought help to pay expenses. It contacted six traditional and non-traditional lending sources and three expressed interest. But it was able to reach agreeable terms with only one — UJA-Federation of New York — which is providing it with a cash advance of up to $10 million.

These and other revelations about the financial collapse of one of the Jewish community’s major social service agencies were revealed as part of FEGS’ bankruptcy court filing March 18.

And for the first time, Kristin Woodlock, FEGS’ CEO, spelled out the reasons one of the nation’s largest social service agencies serving 120,000 clients was forced to announce Jan. 30 that it would be shutting down and transferring its programs to other vendors over the coming months. The first transfer of 11 programs since the bankruptcy filing occurred today [April 1].

“No single, but rather a confluence of factors and events have led to FEGS’ financial crisis,” Woodlock explained in a 41-page affidavit submitted to the court. “A continuing decrease in revenue without corresponding cost cuts led to substantial operating losses and escalating financial difficulties over the last several years. For example, while revenues fell between fiscal 2013 and 2014, aggregate salaries and benefits increased 7 percent.”

FEGS said in its court papers that the programs of greatest concern were those for persons with developmental disabilities, its residential programs, and some of its workforce, education and youth programs. As a result, it said, they were at the top of the list for transfer to other more financially sound service providers.

The Wellness, Comprehensive Assessment, Rehabilitation and Employment Program, for instance, a critical service for the city to meet state and federal welfare requirements, was found to have lost about $11 million last year, including projected close out costs. On Jan. 26, an agreement was signed to transfer the program to Fedcap Rehabilitation Services.

FEGS said it had also arranged to transfer 10 other unprofitable programs that represented a “cash flow drain.” It asked the court to authorize these transfers effective today because failure to do so would “completely undermine the continued viability of the programs to be transferred, put [FEGS’] clients safety and welfare at risk, and cost significant administrative losses … it was ill equipped to sustain at this critical juncture.”

Judge Robert E. Grossman of the U.S. Bankruptcy Court in Central Islip, L.I., agreed to the transfer yesterday, effective today.

FEGS’ court papers listed the following as among the other key reasons for its demise:

– Given FEGS’ “historical concentration on top line growth without due concern to contract viability within [its] existing administrative framework and business models, and its inadequate financial systems and revenue cycle management which compromised its ability to timely monitor spending and accounts receivable, [FEGS] financial performance on the workforce governmental contracts was among the worst in all its business lines.”

– FEGS’ “financial performance under those agreements was further exacerbated by a failure to adequately reserve and plan for the repayment of significant regulatory and governmental advances and contract termination costs.”

– FEGS “failed to adequately reserve and plan for the repayment of significant regulatory and governmental advances and contract termination costs.”

– FEGS was “overburdened by multiple space obligations, which substantially exceeded [its] physical needs and financial capabilities, leading to significant unreimbursable costs … as a result of the unallocated and vacant space.”

– FEGS had a “an overly prohibitive administrative cost structure, which was significantly more than … industry standards, coupled with the inability to keep pace with the growing complexities of the organization as a whole.”

– FEGS entered into “numerous unprofitable agreements.”

– FEGS invested in for-profit affiliates outside its usual service area hoping to generate income. Among the companies were AllSector, HRD and Single Point. It outsourced its IT (information technology) and human resources functions to those affiliates “in the hope these ventures would develop a third party client base that would reduce its administrative costs for these functions and produce profits at the same time.
“However, [FEGS] remained the predominant customer for these affiliates’ services, which proved unable to develop [a] sufficient third party client base necessary to function as stand alone entities. As a result, instead of its administrative costs subsequently being reduced, FEGS was forced to fund these affiliates’ cash requirements and losses.”

As of last June 30, FEGS’ total unrestricted assets were about $144 million and its liabilities totaled about $105 million. Its revenues for fiscal year 2014 were about $264 million and its liabilities about $105 million.

Woodlock said FEGS operated in more than 350 locations throughout the New York metropolitan area and Long Island with a staff of 2,217 skilled professionals, of whom 1,405 belonged to District Council 1707, Local 215 of the American Federation of State, County and Municipal Employees.

Prior to filing for bankruptcy, FEGS gave termination notices to hundreds of employees of programs that had been transferred to other service providers. As a result, as of March 18 it employed about 1902 skilled professionals, of whom 1,203 are union members. Its biweekly payroll was about $3.6 million, including benefits.

Woodlock asked the court to allow FEGS to pay all of its current and recently terminated employees both their wages and other benefits.

“The employees will suffer undue hardship and, in many instances, serious financial difficulties without” such payments,” Woodlock said. “Without the requested relief, [FEGS’] stability would likely be seriously undermined at the outset of this [bankruptcy filing]. Any delay in paying wages, benefits, severance and deductions or expenses [of employees terminated before the bankruptcy filing] would seriously harm [FEGS’] relationship with its employees and could irreparably impair employee morale at the very time the deduction, confidence and cooperation of the employees is most critical. Nor can [FEGS] afford to jeopardize client safety by the destabilization of the employee workforce.”

Judge Grossman said he would consider that request on April 16.

Larry Cary, general counsel for District Council 1707, said that under the law, each employee terminated prior to the bankruptcy filing would receive no more than about $12,000. He said the union filed yesterday a class action grievance in their behalf over FEGS’ failure to pay them their wages, vacation and severance.

In addition, he said those employees with seniority whose programs were already transferred to other service providers should have “bumping rights” to move into FEGS’ programs not yet terminated. But, Cary said, FEGS has not provided the union with the list of senior employees.

Cary said the union would be applying to get onto the creditors’ committee because one of the benefit funds co-administered by the union shows an audited deficit of $130,000, which would make the union one of FEGS’ largest creditors.

In addition, Cary said the union is encouraging service providers who are picking up FEGS’ programs to hire FEGS’ staff. And he said the union plans to hold a job fair and invite those new service providers in the hope they would hire the former employees.

He noted that after terminated FEGS workers picketed the office of a service provider who had picked up a FEGS program without hiring any FEGS’ staff, the service provider offered jobs to several former FEGS’ employees.

stewart@jewishweek.org

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