A Case Study of Board Nonfeasance: Community Action of Minneapolis

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Last Friday, state officials showed up at Community Action of Minneapolis and seized financial records and computer hardware. By 11am, the agency had shut down, leaving programs closed and employees without jobs.

A little late to the party, two members of the board who were appointed by the Minneapolis City Council joined Rep. Keith Ellison (DFL-MN) and a few other Community Action board members in tendering their resignations. How they think that their ex post facto resignations will alleviate them of responsibility for their fiduciary oversight or lack of it in the events that led to the devastating audit released by the Department of Human Services in August, we’re not sure.

A Community Action board member named Manuel Rubio acknowledged to the press, “There is so much that we did not know about.”

Maybe the board should have been a bit less clueless. Accompanying the Friday shutdown were notices from the Minnesota Department of Commerce announcing that the state was terminating its support of the agency’s Low-Income Energy Assistance Program and Weatherization Assistance Program grants due to the state’s “serious concerns” about Community Action’s “stewardship of resources and declining ability to service low-income individuals in Minneapolis.” The Department of Human Services issued a letter terminating the agency’s “recognition and designation as a Community Action Agency and…all related state and federal grant contracts.”


Perhaps board member Rubio might benefit from reading the DHS audit for some hints about what he and his colleagues should have been paying attention to as the agency sunk into an abyss of financial mismanagement. These excerpts from the audit are useful insights into the management practices of Community Action of Minneapolis, covering the period of June 30, 2011 through July 1, 2013. The first finding related to the functions of Rubio and his colleagues:

  • “Board management does not provide independent and objective oversight of senior management or program operations.”
  • “We found no evidence the board has ever been fully staffed at the minimum level of 15 board members. Currently, the board has four positions that are vacant, and has had at least two vacant positions every year since 2000. In addition, the board chair and three other board members have all served consecutive terms ranging from 11-13 years on the board, thereby violating the by-laws which limit each position to a maximum of two consecutive three year terms. The consecutive terms served by the board chair and three other board members also exceed the ten-year limit as allowed in statute.”
  • “We believe poor oversight by the board contributed to a culture of excessive spending on administrative costs, including unallowable personal benefits to board members, senior management and Community Action of Minneapolis staff for two weekend retreats at Arrowwood Resort Hotel and Conference Center in Alexandria…In addition, program budgets and actual expenses were not sufficiently scrutinized by the board, and projected outcomes were not monitored and compared frequently to actual reports of the diminished number of clients served”
  • “Without full board membership and proper review of financial activities, it is difficult for the board to achieve its mission of providing oversight and strategic direction on operations. The lack of proper oversight by the board allowed senior management to create a culture tolerant of administrative costs that are excessively high in comparison to program costs… In addition, the lack of proper oversight of senior management by the current board also contributed to inaccurate allocations… unallowable costs…and a direct reduction of community services to needy recipients”

It may be a tenet of some nonprofit advocates that administrative expenditures merit much more investment than they typically get from nonprofit organizations, but the Community Action of Minneapolis took that message to an unimaginable extreme:

“[An] example of a lack of oversight occurred when Community Action of Minneapolis submitted its 2012-2013 allocation to the Office of Economic Opportunity. Community Action of Minneapolis proposed to eliminate the second year of program outcomes in the 2012-2013 allocation in its entirety and allocate 100% of funds to administrative costs. The proposal was designed to increase administrative costs (i.e., travel and training) available for Community Action of Minneapolis staff expenses and eliminate program funds that would provide services to clients. The 2012-2013 proposal was submitted by senior management and approved by the board…”

The state had rejected the idea of devoting all grant moneys to administrative costs, but in its 2014-2015 budget allocated 68 percent of its funds to administrative costs. No offense to proponents of large increases in administrative expenditures, but Community Action of Minneapolis’s approach is impossible to justify or explain.

While it wouldn’t be surprising for board members to expect expenditures to be adequately documented by the staff and to take their word for that, the board seems to have fallen asleep on the job in approving expenditures in the first place. Among the expenses that DHS’s audit found lacking in a legitimate business purpose were “airfare and cell phone roaming charges for a trip to the Bahamas by the Chief Executive Officer, airfare to the Bahamas for a personal friend (i.e., not an employee) of the Chief Executive Officer, airfare for the spouse of a board member to New York, golf-related expenses in Florida; food and lodging expenses including entertainment services for board members and their spouses during an internal training convention; Celebrity Cruise; Car washes and a Costco membership.” The board also approved a personal loan of $36,430 to the Community Action executive director, which nearly anyone even vaguely familiar with federal grant rules would know is not allowable from federal funds. The board also gave the executive director a bonus of $17,624, which was more than $12,000 above the maximum allowable in the agency’s merit-based incentive plan.

Here’s the telling part: The board itself was a beneficiary of its lack of oversight.

“Community Action of Minneapolis charged over $30,640 to the Community Services Block Grant and $4,252 to the Community Action Grant for undocumented or unallowable activities reimbursed to board members and senior management. These activities, which included food, lodging, and other entertainment services do not appear to serve a business purpose, and are considered waste and abuse as defined in state policy. The majority of the costs charged to board allowances were for two training weekends for staff, senior management and board members (including spouses). Community Action of Minneapolis paid approximately $9,000 for lodging, $3,200 for food, $900 for spa and $171 for golf for the two training weekends… Other expenses charged to the board allowance account appear to be per diem payments to board members, which are not established as authorized or allowable payments in the board by-laws except for reimbursement of expenses for low-income board and committee members.”

Clearly part of the problem of the board was the use of proxy representatives standing in for public sector leaders on the board who were officially in charge of the agency’s governance. According to the agency’s 2011 annual report, the public sector board members who used proxies were Congressman Keith Ellison, State Senator Jeffrey Hayden, Minneapolis City Council president Barbara Johnson, and Minneapolis City Council vice president Robert Lilligren, though the agency’s webpage lists Minneapolis City Council member Blong Yang as a board member using a board proxy. As public officials, they should be embarrassed and mortified by their lack of accountability and responsibility in their roles as Community Action of Minneapolis board members. Using proxies is no excuse. But other board members have no excuse either. As of the agency’s 2011 annual report, those board members included D. Michael Anderson, an executive from Highland Bank; Evelyn A. LaRue, an official with the Minneapolis Public Housing Authority; and the aforementioned Manuel Rubio, representing Oak Knoll Lutheran Church. It seems like the board had used proxies for more than board meetings, more like their fiduciary judgments.

Rather than the panoply of training programs and handbooks on nonprofit board membership, read the DHS audit of Community Action of Minneapolis for a powerful and instructive treatise of what happens when a nonprofit board isn’t doing its job. The sad coda of this is that some staff of the agency and the low-income residents to be served by the agency’s programs will lose out as a result of this case study of board irresponsibility.

ADDENDUM: As a postscript to the commentary on the DHS audit of Community Action of Minneapolis, it is worth noting the publication of a letter to the Minnesota Attorney General from a Frederica (or Fredda) Scobey, a former Community Action employee. According to her LinkedIn profile, Scobey was the manager of community relations at Community Action of Minneapolis between 1993 and 2003, meaning that she was not on the Community Action staff during the period covered in the DHS audit. She alleges that during her time at Community Action, the agency’s CEO, William Davis, traveled to South Africa and Russia, the costs paid by the anti-poverty agency, but “somehow CFO Anthony Spears hid these trips.” She says that staff worked on the CFO’s private business, a daycare facility, creating brochures and doing IT work on Community Action of Minneapolis time. Without specifics, Scobey reports that expensive parties and trips to resorts known for “good golfing” were part of the agency’s typical practices. The letter implies that staff who tried to report misbehavior to the Community Action board were subject to “harsh consequences” from Davis.

In the wake of the DHS audit, more statements like Scobey’s may appear, given cover by the press coverage of the audit and the crescendo of calls to Minnesota Attorney General Lori Swanson for investigations and prosecution of alleged wrongdoing. However, if it is true that staff went to the board to reveal misspending and other practices and were either rebuffed or made vulnerable to retaliation by the CEO, the board of the agency, including the high-profile political members of the board, have much to explain and much to apologize for. The dimension of board member culpability here is an integral part of the agency’s managerial problems. Explanations that they didn’t attend board meetings but simply sent proxies to hold their seats are not just insufficient, but pathetic.

  • Peter Probity

    I serve as treasurer of a non-profit organization. We currently have about $100K liquid and our annual budget is about $60K. I do not receive compensation for serving. The staff person, the board chair, and other members of the board are constantly pressuring me to falsify the financial records. What should I do?

  • John Brothers

    I might begin by saying that I grew up in Minneapolis, my family received services from Minneapolis Community Action and my first job out of college was at the organization. My experience was a positive one and my interactions with Mr. Davis and others were very positive and helpful to me as I began my career.

    I have no insight into the issues around the allegations outlined in the article above and wanted to highlight another area, which I think is pretty important, which is around the governance requirement of community action agencies.

    Having worked with a number of CAAs and having just served as an Interim Executive for one in NJ, I find that the requirement to have a tripartite board one that is outdated and ineffective. I have written on this for SSIR and talked about it in an Chronicle article earlier in the year. If you look at the issues of CAA in Minneapolis, they are a perfect example of why this model does not work and I have seen it over and over again.

    CAAs often try to fill the government and sometimes community representative seats with anyone that can say “yes” and often government officials cannot make and send proxies, which is what happened here. Those members may only be partially committed to the time it takes and through a proxy are removed from the needs of the organization. I understand the reasons why this model was created (during the late 60’s) but everything that we know about nonprofit governance now, it just is not a model that works and should be abolished.

    I know detractors will say that it is needed and for those who it works well for, meaning the model gives them good governance, great. But to mandate it, is very shortsighted because one governance structure for all is surely going to cause other situations like this.

    I should end by saying that I love the work of CAA, have spoke at their conference and believe that they are at the heart of the poverty movement in the United States, I only hope that they can look at the governance model in Minneapolis and say that there can be another way.

  • Mary Warner

    Peter – Does your organization use an outside accountant for an audit, account review, or to put together IRS Form 990? If the accounting firm is reputable, it will uncover irregularities in accounting. In fact, when my organization has undergone audits, the accountant has specifically asked me, as staff bookkeeper, and board members if there is any evidence of fraud in the organization. If you falsify records based on pressure from others in the organization, how will you respond to such questions?

    If I were in your position, I’d unequivocally tell others in your organization that you will NOT under any circumstances falsify financial records. This isn’t just about you and the org; it’s about the public’s trust in your organization. It also has serious legal ramifications for all involved, as should be obvious from the story above. If people in the org insist you falsify records or keep nagging you to do so, I’d tender my resignation. I’d also consider reporting the organization to the State Attorney General’s Office, although I’ve seen others in my community attempt to do this with seriously malfunctioning nonprofits and they haven’t gotten anywhere. Makes me wonder if the state only gets involved (either Attorney General or Secretary of State) if a nonprofit’s malfeasance makes headlines.

    Good luck.

  • George Myers

    As a consultant who does a lot of board training, this is so sad to read. We pound into board member brains that they are responsible for the leadership and oversight of the organization they serve on. These are legal duties we say.

    What is disturbing is that the political intertwining of this agency with the public sector seemed to shield them for years. And now that someone is shining light on the shenanigans (and potential criminal violations of federal grants regulations), it seems months later to not incur any consequences for the board members.

    When the board encompasses politicians from the local, state and federal levels, who first feel they don’t need to even show up for meetings, or monitior audits or other information they are responsible for, and then feel they can just resign and walk away and claim ignorance is appalling. And to not be questioned for that lack of responsibility, just seems to imply that this nonprofit is being treated differently from one that is not so closely alligned with those whose duty it is to prosecute this type of abuse.

    The people leading good strong nonprofits who read this article know they would be treated differently if they took a personal loan from their federal grant, took a trip to South Africa, or submitted spa expenses. Sad.