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Soundings

Steven Malanga
Nonprofiteers
Recent Gotham scandals show how nonprofits often fleece taxpayers.
Autumn 2005

Two New York City nonprofit scandals this summer remind us how easily government’s widespread practice of contracting with these private groups for health care and social services—a multibillion-dollar enterprise—can fall prey to political manipulation. Many—even most—of the contracts lack adequate oversight and performance requirements.

Consider, for instance, the case of New York City Councilwoman Margarita Lopez, who steered funds to a Scientology-based program to cleanse 9/11 rescuers of inhaled pollutants. As chair of the council’s mental health committee, Lopez praised the program (at first privately funded by celebrity Scientologist Tom Cruise) for treating city workers who aided Ground Zero rescue efforts. She then finagled a city grant of $30,000 for it—an amount that skyrocketed to $630,000 in taxpayer money after Scientologists began pouring contributions into Lopez’s unsuccessful campaign for Manhattan borough president.

What alarms many about this case is the appearance of a quid pro quo—Lopez’s support seemingly exchanged for the group’s political contributions. But the real outrage should be how easily Lopez maneuvered taxpayer funds toward a program that has no scientific basis and that knowledgeable critics dismiss as risibly ineffective. In a City Council hearing, Lopez huffily asked, “Who are the stupid people who are criticizing [the program]?” The “stupid people” include many of the nation’s top scientists and toxicologists. As far back as 1988, Shreveport, Louisiana, commissioned a study on the program; the independent toxicologist’s report branded it “quackery.” Earlier this year, California’s superintendent of public instruction urged state schools to bar a free Scientology-based drug treatment program (on whose detoxification principles New York’s program rests) after a panel of medical doctors and school health–education specialists concluded that it “does not reflect accurate, widely accepted medical and scientific evidence.”

Yet Lopez could completely ignore this readily available informed opinion: there’s not much in current social-services contracting or grant-making processes (in New York and elsewhere) that prevents a politician or government agency from funding services and treatments based on unproven techniques, or from shoveling money to organizations with weak track records. Thus, job-training centers win funding even when those running them have little experience and the centers place few applicants in jobs, community development groups still get financing even when there’s little evidence that they’re improving their neighborhoods, and so on. As the Lopez case shows, the key to securing government contracts is often just a matter of finding the right politician to back your program, at taxpayer expense.

The biggest winners are often the folks running the programs, as another summer scandal illustrates. In June, investigators announced that the city was yanking $10 million in contracts from the Bronx’s Gloria Wise Boys & Girls Club Inc. for “inappropriate transactions and falsified documents” submitted to city agencies. Later, press leaks revealed that the city had uncovered a fishy Boys & Girls Club loan of some $875,000 of taxpayers’ money to the fledgling lefty radio network Air America, whose chairman at the time was also the club’s director of development—revelations that forced the departure of the official and several other executives from the club.

The scandal opened the club’s books, revealing the kind of government-dependent institution that it had become—and how much it overpaid its officers to provide city-contracted services that volunteer groups once offered at no public expense and that are hardly essential in any case. Begun after the Civil War by volunteers in cities and towns seeking alternative activities for troubled kids who otherwise would roam the streets, Boys Clubs spread rapidly around America; today, some 1,700 groups affiliate with the national organization.

If your image of these clubs is of ardent volunteers working tirelessly to help kids by setting up basketball programs or Little Leagues and operating largely on donations, forget it. The flood of government spending on social services, which began during the 1960s and has swollen inexorably since, has transformed many of these organizations and others like them into public contractors, staffed by social-services “entrepreneurs” who go where the government funding is. Even the national Boys & Girls Clubs organization now gets 60 percent of its money from government.

Gloria Wise, founded in 1977, is a quintessential example of a nonprofit essentially made of government money. It and its nursery-school affiliate had nearly $9 million in revenue in 2002 (the last year for which documents are available). Yet only $529,740 of that money, or 6 percent, came from contributions, while more than 80 percent came from taxpayers. The club used that money to run a variety of programs aimed at kids, from something called “homework empowerment” to pen-pal clubs to “resistance skills programs” designed to help kids resist peer pressure.

Club execs enjoyed rich compensation for running these clearly nonessential programs. The executive director took home about $225,000 yearly in salary (including nearly $80,000 annually for 15 hours a week at the nursery school). The assistant director received roughly $158,000. The salary of the nursery school’s director of education would be the envy of even well-paid public school principals: $181,047.

These salaries are way out of line for groups of this size and for programs of this type, according to a Nonprofit Times survey. Yet though both the state attorney general and the Internal Revenue Service can investigate a nonprofit for excessive compensation, the kind of cases they take on tend to involve salaries in the millions. Paying hundreds of thousands of dollars to a nonprofit executive running after-school programs doesn’t qualify as excessive.

Given that New York City alone pays billions in contracting fees to thousands of social-services nonprofits every year, the real scandal is less shady loans than the likelihood of taxpayer money enriching nonprofit entrepreneurs whose compensation far outweighs any services rendered.

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