Opinion: Charities on the dole

FEGS, or Federation Employment and Guidance Service, was founded in 1934 as a small Jewish charity in New York. Over 80 years, it grew into a sprawling, $230 million social services nonprofit, helping welfare recipients find jobs, providing housing for people with disabilities, and offering home care for the poor. Its sudden collapse earlier this year—it filed for bankruptcy in March, owing $2.3 million to the New York State Office of Mental Health and another $12 million in construction loans—illustrates how government money has transformed religious and mutual-aid philanthropic organizations and the risks that such groups take when they chase public funding.

FEGS’s messy collapse marks an inglorious end to an institution that began by using charitable money to provide vocational services to Jewish immigrants. This task grew broader and more urgent with the flight of Jews from Europe to America during the late 1930s. During World War II, FEGS, then called Federation Employment Service, expanded its mission to run recruiting drives for local manufacturers contributing to the war effort. After the war, FEGS helped place veterans in jobs.

Like many charities, FEGS’s mission began to change more dramatically with the rise of government-funded social services, starting with President Lyndon Johnson’s “war on poverty.” By the late 1960s, FEGS was operating federally funded Youth Corps summer-employment programs. In the 1970s, it took on government-financed programs to serve meals to the elderly and counsel troubled youths. By then, FEGS was part of a broader network of some 130 New York Jewish philanthropies with a collective budget of $200 million, over half of which government supplied.

Today, FEGS essentially turned into a government contractor—in some ways, virtually indistinguishable from government agencies. The organization’s 2013 IRS filing, for instance, lists $227 million in total revenues—including $93 million in government grants and $119 million in program revenues, much of it from providing services funded by public-sector programs like Medicaid. By contrast, fundraising events and nongovernment grants and contributions brought in just $1 million and $4.3 million, respectively.

FEGS’s evolution is fairly common among many other nonprofits that got their start as charities. A 2014 examination of the funding sources of 3,600 Jewish nonprofits by the Forward estimated that 79 percent of the $5 billion that these groups generated for spending on social services came from government grants and program services. Just 15 percent originated from private contributions. Decades ago, these groups largely relied on private contributions and grants from organizations like UJA-Federation.

Jewish groups aren’t alone in their reliance on government funding. During the late 1990s, Catholic Charities USA opposed congressional efforts to slow federal welfare spending by instituting work requirements for recipients. At the time, the organization was receiving almost two-thirds of its revenues from government to run social services programs, prompting Senator Rick Santorum to observe that the organization “can do little that is uniquely Catholic. They have to do what the government dictates.” (See “How Catholic Charities Lost Its Soul”.)

Groups such as FEGS and Catholic Charities wind up chasing public contracts for programs designed by government bureaucrats, rather than responding to charitable directives generated by their community. FEGS appears to have bid so aggressively for contracts that it lost money on nearly three-quarters of the programs it ran. The nonprofit also used the borrowing power of the state and the collateral provided by government contracts to incur unwise obligations, including $14 million in future mortgage payments and $90 million in long-term operating leases.

About two-thirds of FEGS employees were members of a government union—the American Federation of State, County and Municipal Employees (AFSCME)—and some of the nonprofit’s pay practices reflect the kinds of questionable arrangements often found in the public sector. FEGS granted workers cash for unused vacation time—an expensive perk—as well as severance pay equal to up to 45 days for experienced workers. The nonprofit’s 990 forms show up to $10.8 million in liabilities for these accrued benefits. In July 2014, FEGS even signed a new collective bargaining agreement with AFSCME that reflected none of the financial realities that it was facing. That year, FEGS’s compensation costs rose by 14 percent even as the nonprofit barreled toward insolvency. It also paid rich executive compensation, including $638,000 in 2013 to the president who presided over its decline, and to whom FEGS also owes $1.2 million in deferred compensation.

The communities that once supported these groups now have less of a stake in their performance. Oversight subsequently suffers. FEGS’ board of trustees was filled with some of the leading figures in New York’s private sector. In the past, the larger community of donors to FEGS could have relied on such board members to protect their investment in the charity. Yet the FEGS board seemed to have little idea about what was going on. “Where were the board members?” one recent editorial lamented. They certainly weren’t looking out for the interests of taxpayers, who are now the biggest stakeholders in FEGS.

For religious-affiliated nonprofits, the problem goes beyond the question of oversight. To what extent does government money ultimately undermine their mission? Defenders of the government deals argue that doing good, even with public money, is still worthwhile—but FEGS’s collapse after becoming a government-contracting giant suggests that it had lost its effectiveness at doing good. And increasingly, aggressive politicians use government money to bully groups into adopting policies contrary to their beliefs. The courts have already forced the Salvation Army to alter its hiring practice for programs that receive government funds—the organization can no longer give employment preference to evangelical Christians for such programs. Governments have also tangled with the Catholic Church, trying to require that programs receiving federal money offer health insurance that includes contraceptive coverage. Tired of the pressure, some groups, like Catholic Charities in Tulsa, Oklahoma, have withdrawn completely from accepting public funding.

Sooner or later, charities will have to choose between the lure of government money and fidelity to their stated mission. But FEGS won’t be around when that day of reckoning comes.

Steven Malanga is the senior editor of City Journal, a senior fellow at the Manhattan Institute, and the author of Shakedown: The Continuing Conspiracy Against the American Taxpayer.