DATELINE: July 28, 2008, Chicago
Two in one month, pretty amazing. Last Thursday, Carolyn Y. Smith, the president of the Southeastern Economic Development Corp (SEDC) was terminated by a board of directors that was under pressure from Mayor Jerry Sanders to bring down the axe. Will Carless, SEDC President Ousted, Voice of San Diego, July 24, 2008; and Helen Gao and Jeff McDonald, SEDC Board Fires Embattled President, San Diego Union Tribune, July 24, 2008. The pressure began building several weeks ago when it was revealed that SEDC employees, including Smith, had received $1 million in compensation during the last five years. The agency had budgeted $462,000, but the it actually paid
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$1,081.533 in additional compensation. Will Carless and Andrew Donohue, SEDC's Answers on Bonuses Don't Add Up, Voice of San Diego, July 19, 2008. According to the Voice of San Diego, Smith was one of the prime beneficiaries, receiving $293,000 in extra payments over a five-year period.
As is often typical in these situations, the extra pay began to grow at an accelerated rate. According to Jeff McDonald and Helen Gao of the San Diego Union. In 2003, the extra pay by the agency totaled $107,000, but by 2007, it had jumped to $315,000. Agency Paid 15 Workers More Than $1 Million Extra, July 19, 2008. During the past two years, Smith, together with finance director Dante Dayacap, received $319,000 in extra compensation. That, according to the San Diego Union, was more than 50% of their base salaries. What is not entirely clear is who was approving these additional amounts. The San Diego Union also reported that between 2003 and 2007, $10 million of SEDC's $36 million in total expense were devoted to administration. Only $5.5 million of the total budget went to project improvements. Jeff McDonald and Helen Gao, Redeveopment Groups' Troubles Linger: SEDC Chairman's Real Estate Dealings Under Investigation, San Diego Union, July 25, 2008. In that same article, McDonald and Gao report that "[t]wo people have told [it] that the FBI has questioned them about Owen's [chair of SEDC's board] land deals."
One day following Smith's resignation, Nancy Graham, the president and CEO of Centre City Development Corp, another nonprofit involved in San Diego redevelopment activities, resigned. She attributed to concerns over her mother's health. Rob Davis, City Says Goodbye to Two Redevelopment Bosses in 24 Hours, Voice of San Diego, July 25, 2008. The day before, the City of San Diego began audits of CCDC and other redevelopment agencies. Whatever the reason for Graham's resignation, her departure leaves potential questions regarding inconsistent statements and their implications unanswered. According to Davis,
Graham has drawn attention for her changing story about her involvement in negotiations with the developer of a $409 million downtown skyscraper. She was a former business partner with a sister company of Related of California, the developer of a 41-story building downtown at 7th Avenue and Market Street, and met with the company during the deal's negotiation process, despite saying publicly she was not involved.
There is some pretty good reporting on Davis' part. He apparently obtained a copy of Graham's calendar, which showed she had attended meetings regarding the negotiations even though she had said she was not involved. Rob Davis, Development Official Keeps Away From Iconic Building, Voice of San Diego, May 9, 2008. She finally acknowledged some involvement. Rob Davis, Despite Recusal, CCDC Head Participated in Project, Voice of San Diego, July 1, 2008. It sounds as if Graham's involvement in the transaction was minor, but her prior history certainly opens the extent of that involvement up to question. According to Davis, Graham had prior involvements with Related affiliates. When she was Mayor of West Palm Beach (1991-1999), she led downtown redevelopment activities which resulted in a Related affiliate developing a $500 million mixed-use project. After leaving office, she jointly developed (through their company, N-K Ventures) a $100 million condo project with another Related affiliate. At some point, she became the executive director of West Palm Beach 's Downtown Development Authority, but ended up leaving after what Davis described as a well-publicized rift with West Palm Beach Mayor Lois Frankel, who told the West Palm Beach Post that she was uncomfortable with Graham's relationship with Related.
Both CCDC and SEDC are Section 501(c)(3) organizations, although both are closely-related to the City of San Diego. No matter how these two stories play out, both agencies have been seriously damaged. In SEDC's case by the extra salaries, a major conflict of interest, and high administrative expenses. In CCDC's case, by the apparent involvement by its president and CEO in negotiations following her claimed recusal. The San Diego Union Tribune and Voice of San Diego will undoubtedly continue their dogged pursuit and coverage of both stories in the coming days. Who knows what else they will uncover.
A debate is now raging in San Diego over these and other development entities. According to San Diego Union reporter Matthew T. Hall, Mayor Sanders believes SEDC and CCDC should continue on their missions. CCDC, SEDC Facing Shake-Ups, Changes, July 27, 2008. He would like to replace some of SEDC's board members and improve its financial controls. He also recognizes to find new heads for CCDC and SEDC. A developer quoted in the article takes another view. Doug Manchester would like both agencies eliminated on grounds that they do nothing more than "push papers," hire lots of consultants, and create unneeded bureaucracy.
Presumably those working for and running both nonprofits believe in the mission. Therein lies the lesson for others who work for nonprofits. Acutal and the potential for conflicts of interest, unexplained compensation, and discrepancies over the magnitude of administrative expenses raise serious questions about oversight and governance. That almost always leads to questions regarding resource utilization and efficiency. All of those questions can have an impact on funding decisions by government and private grant makers. In short, poor governance can strangle a nonprofit's funding and threaten its very existence. It also can adversely affect other nonprofits. According to Helen Gao of the San Diego Union, Mayor Sanders now plans to have "performance audits done on two other city-affiliated nonprofits." Three Other City Non-Profits to be Audited, July 24, 2008.
As the SEDC and CCDC stories both aptly demonstrate, the media is becoming much more aggressive in covering governance failures. The reporting by both the San Diego Union Tribune and Voice of San Diego has been spectacular. The level of detail uncovered by both media outlets has been astonishing. The reporters have dug deep, following leads and developing extensive background information that provides context. Other nonprofits should heed the implicit warning in this coverage. With the new Form 990 about to go live, we can expect more stories like the ones from the Union Tribune and Voice of San Diego. More information means more threads to pull on. The new Form 990s disclosures pertaining to conflicts of interest, compensation, governance, board independence, and a host of other matters will make the jobs of reporters much easier. Given the low-hanging fruit and easy availability of this information, we expect that more and more reporters will go for the Pulitzer. That means that all nonprofits must not only think about how information is disclosed on the Form, but more importantly about how they are governed.
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