Sudden Growth: One Nonprofit Goes Bankrupt, Another Adopts $75M in Contracts

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David Rivel
Image Credit: The Jewish Board

This interview with David Rivel, CEO of the Jewish Board of Family and Children’s Services, offers a rare revelation of what an organization must consider when a sudden growth opportunity presents itself through another agency’s failure. NPQ has been following the case of FEGS since it announced it was filing for bankruptcy. A $250 million/year social services agency, FEGS had made what appears to be a number of missteps in its financial structure. An autopsy by a special commission is now underway, but what would happen to the agency’s clients, employees, and contracts in the meantime?


Ruth McCambridge (RM): Can you talk a little bit about when you first heard about what was going on at FEGS and what your reaction was?

David Rivel (DR): First, I heard Gail [Magaliff, the CEO] was leaving, who was a wonderful colleague in the UJA-Federation network, so I knew her quite well. And, then, the sort of stranger news that Ira [Machowsky, the executive VP], who had been designated her successor, was also leaving—but this was all stuff I was reading in the press, along with everyone else. I had no particular inside knowledge and my reaction quite simply was shock—shock and sadness. This is an organization that we knew well, that we worked with, that was a colleague of ours for many years. We had and have the greatest respect for the people in the organization, and for them to have to declare bankruptcy and for it to unfold so quickly was something that was shocking and sad, not just to me but to all of us here.

RM: So as you watched all of that unfold, was there anything going on in your mind about taking over some of those programs? When did that thought occur to you and how did you approach it?

DR: Well, we were contacted in January by the New York State Office of Mental Health, and they said that they had made the decision to preserve all of FEGS’ behavioral health programs—the clinics, the supportive housing, the care management, the day programs. They decided it was in the best interests of the clients and in the best interests of the staff to keep all those programs together as opposed to splitting them up and giving them to different agencies.

As you know, that did not happen with the programs for people with developmental disabilities. Those programs were RFP’d to a variety of agencies, and there were eventually six or seven different providers that ended up taking those programs. But the New York State Office of Mental Health, OMH, made the decision that they wanted to keep the behavioral health programs together. They told me that they had done an internal analysis where they looked at the array of the potential organizations that could take over the behavioral health portfolio, and that the Jewish Board in this analysis came out number one by quite a wide margin. And, so, they were calling me to see if we were interested and available to take over the behavioral health programs.

The very next day, I was contacted by the New York City Department of Health and Mental Hygiene and they said, “We just heard the State [of New York] made the decision to award all of the FEGS’ programs to you. We think that’s a great idea, and we think that you should take all of the Department of Health and Mental Hygiene Programs as well.” So, that was quite a one-two punch for us, to hear that people wanted us to take over what turned out to be $75 million worth of programs in four boroughs of New York City—other than Staten Island—and Nassau and Suffolk County, and to do it very quickly because FEGS was declaring bankruptcy and nobody knew how long FEGS would be able to exist as an independent entity. So they wanted us to decide quickly.

We pulled together all of the key staff people and all of the key board people, and we had a series of discussions over a period of a couple of weeks. We decided that it was important for the field for us to be able to take over these programs.

And that, in a nutshell, is what happened.

RM: How big were you before you took these programs on?

DR: So, we were a $175 million organization. We were certainly one of the largest human service agencies in New York City. By some definitions, we were the largest; both FEGS and SCO have slightly larger budgets, but they both spend a lot of money in Long Island, so if you look at the organizations that spend money in New York City, we were the largest before. But we went from $175 million to a $250 million organization literally overnight. That night was Sunday night, four days ago. We then became the largest social service agency by any definition in New York City.

RM: That is a big jump. Where there doubters on the board? Were there people who felt like that was too much growth too fast, that it would hurt you in some way?

DR: Well, I think it’s fair to say that we all wanted to be able to say yes, but we also wanted to do our due diligence and make sure that this was something that would not come back to haunt us. And, when I say “we,” I’m talking about all of us on the senior staff and all of us on the executive committee of the board because we together had a number of conversations. We were concerned both about the initial expense of taking on these programs, which I’ll talk about in a second, and we were concerned about the ongoing financial burden of the programs going forward. Those were two separate issues, and we looked at both of them separately.

With regard to the first issue, we recognized very early that the size and scope and the rapidity of the transition would impose a whole host of costs just having to do with the transition. Keep in mind, again, we were first notified in mid-January that we would be taking over programs as of June 1st, so that is a five-month period to think about how you digest $75 million a program, 800 staff people, and 8,000 clients. We recognized very early on that there would be an enormous cost just to the transition, just to the initial phase, because, remember, FEGS was declaring bankruptcy, so none of their assets were really available to us.

So, for all of the 800 staff that are included in this transition, we need to buy them new computers. We need to load those computers with software. We need to buy new telephones. We need to network all of this equipment to each other. We need to network this equipment back to our central servers. Because of the additional capacity, we need to have more backup and storage capacity than we’ve ever had before.

Then, we need to onboard 800 new staff. Every staff person needs to be fingerprinted, needs a background check. We need to review every client record. We need to review all of the psychiatric records, there’s a tremendous amount of work that needed to be done, and there was no way that we could do that ourselves. We needed temporary staff, we needed consultants, and that was a very significant cost. And we turned to both the State and to UJA-Federation to ask them to support the first-year transition and they both responded wonderfully.

RM: What’s the approximate price tag of just those transition costs?

DR: Well, we’re still in the middle of it, but I will tell you that it was millions and millions of dollars, and the State and UJA-Federation both agreed—and both agreed pretty quickly—that they would support us in this transition, and we’re incredibly grateful for that. But that still left us with the ongoing question of the cost of the programs in Year 2 and beyond, because these programs, like any program a social service agency takes on, is not fully funded by government and so has a funding gap that you have to cover either through fundraising, or by raising more endowment money (the interest and dividends from which can help support the program), or by achieving economies of scale. This is Day 2 of the transition, so it’s too early for me to tell you what combination of strategies we’re going to use to support the ongoing cost of the programs, but it will undoubtedly be a combination of those three things working together.

RM: Have you ramped up any of your infrastructure in terms of development?

DR: Yes, in fact, we hired many of the FEGS staff in areas like finance, budgeting, contracting, and information services, as well as on the program side. I mean, one of the reasons we wanted to do this is we realized that there were 800 people who were in danger of losing their jobs, or at least in danger of having a period of tremendous financial uncertainty, and we felt an obligation to the employees as much as we felt an obligation to the clients and to the programs. We were very pleased to be able to offer jobs to virtually every single person who was working in this portfolio of programs, including the administrative staff that was supporting the programs.

By the way, I should mention that one of the things the State looked at when they were evaluating who could take over these programs was actually that issue: “Who could make this a smooth transition for staff?” And, because FEGS and the Jewish Board happened to share the same union and have a very similar union contract, we knew that that transition could go smoothly for unionized employees. And, because we’re both in the UJA-Federation network, we both participate in the UJA-Federation Pension Program, so those employees who were in the pension program would have their pensions saved, as well. That was an important part of the consideration for the State in selecting us in the first place.

RM: That makes good sense. So, are these people going to be coming to your facilities? Have you had to add office space or any facilities, or have you adopted some of FEGS’? How has that gone?

DR: So, one of the advantages of FEGS going through the bankruptcy court proceeding is that we were actually able to have most of their facilities transfer to us on whatever terms FEGS was currently leasing those properties. In those cases where the lease was up, or for whatever reason it wasn’t advantageous for us to just pick up the lease, we were able to negotiate with the landlords for new leases. Virtually all of the space for these programs has come over to us and is now on leases that we control and that we pay. So, that was the good news for the programs.

For the additional administrative staff, we have had to sublease some additional space, which we’ve done at a location close to us geographically, and we have FEGS staff people coming both to our current headquarters and to the new space that we’re subletting. There are approximately 50 staff people from FEGS not directly involved in the delivery of program services that are coming over to our current headquarters or to the new space that we needed to sublet.

RM: So, how are you handling the integration of staff, culturally and otherwise?

DR: Oh, yes. That’s a big challenge for us. I’ve reached out to a number of colleague organizations that have been through mergers and acquisitions and gotten some advice from them. We’ve also hired some human resources consultants to help us think through what we’re going to do.

As I said in an email to all of the staff yesterday, it’s inevitable that for a period of time we’re going to be very aware of what was a FEGS Program and what was a Jewish Board Program, and who’s a Jewish Board employee and who’s a FEGS employee. And it’s my objective—it’s the objective of the organization—to make sure that period of time is as short as possible and that very quickly we move to a point where it’s one organization all working together.

We have a series of events planned for staff to meet one another over the next six months. Starting next week, we have a meeting of all the senior program managers and administrative managers, a group of about 200 people, both current Jewish Board employees and people who came over from FEGS, so we’re starting with that. That’s next week. And, then, we have a series of other events that we’re rolling out over the next six months. We’re going to be holding town hall meetings in each of the geographic locations where we’re running programs so that people can really get to know each other and meet each other, and we have some training and orientation sessions set up for new staff as we do for any new staff. So, we have a variety of things planned, because you’re right—that’s a major challenge, something we’re very concerned about and something we want to make sure we get right.

RM: You’re a very big organization, and so was FEGS. You had multiple programs, and very often in organizations of that kind, even within one organization, you’ll have all of these various programmatic silos and almost separate identities among the programs. Does that make it easier or harder, do you think, to integrate the whole?

DR: Well, here’s the good news. There are four basic program types that are coming over to us: mental health clinics; PROS programs, which are day programs for adults with mental health struggles; care management; and supportive housing. All four of those programs are programs that Jewish Board runs today and that we have a very big commitment to. So, for example, just to take one of those four categories, mental health clinics, even before June 1st, the Jewish Board had a very large network—in fact, the largest network in New York State—of mental health clinics: 12 primary Article 31 licensed clinics and about 30 satellite clinics. Adding six more clinics, including Long Island and satellite clinics, is something that we can do.

And you’re right that the issue of the siloing of programs is a very real issue. It’s something we’ve been working on here for the last two years; our new strategic plan calls on us to do a number of things to break down those barriers, and we will continue to do that with the new programs that we’ve brought on as well. But you’re right, that’s a very key issue as well.

RM: Now, about your capital structure. I imagine that you probably do not have now twice the number of reserves you had, or twice the endowment you had. So, how are you feeling about that? Because that must be a little concerning.

DR: Yes. So, we’re in the process of setting up a board task force to look at the issue of what the appropriate level of capitalization is for us, and by capitalization we mean a number of things. We mean endowment or investment portfolio, we mean line of credit, and we also mean fundraising capacity, because those are the three ways you can support programs both in the short run and in the long run. And, so, we’re going to take a look at that question. For our current $175 million budget, we have an investment portfolio of about $112 million. That, to us, felt adequate for the size of the organization we are, but it’s probably not adequate for the size of organization that we’ve now become. That’s something we’re going to have to take a very close look at.

RM: Maybe this is too personal, but did you lose any board members over this decision?

DR: No. The board has been incredibly and 100 percent supportive in ways large and small. I just got an email today from a couple of board members who said, “How can we be helpful in actually meeting some of the FEGS staff who have come on and welcome them from the board?” You know, that’s unusual for a board. Board members, our executive committee augmented by a couple of other trustees, have agreed to have weekly phone calls with the senior staff to just check in, see what’s going on, see how they can be helpful. The support of the board has been tremendous and unanimous, and no, there were no board members who have left because of this, far from it.

Actually, what often happens in a period of great transition or crisis—which this is not, but when you have a period of great transition, board members actually become more deeply involved with the organization. They become more engaged because there’s a very tangible set of issues around which they can do that, and that’s happened.

RM: How about your senior management team? Are you bringing new people from FEGS onto the team? Is there any sense that anybody might be a little turfy?

DR: Well, you know, most of the senior managers from FEGS left the organization before June 1st. Keep in mind, we’re not merging with the entire organization; we’re taking over a very significant piece of the organization, and the people who managed that piece of the organization are with us—we hired them. It will be a challenge to make sure that they learn how we do things at the Jewish Board and feel comfortable integrating with the rest of the staff, but we feel very comfortable that that will happen and we’re very interested in making that happen.

RM: What do you anticipate might be some of the biggest challenges over the coming two or three years around this? What would be your markers of success, showing you that things are progressing as they should?

DR: I think the two biggest challenges are the financial challenge of supporting these programs going forward and the cultural challenge of making sure that staff is completely and seamlessly integrated. The financial markers are pretty easy to talk about. We’ve given ourselves a couple of years to get to the point where we have a balanced budget in these programs, and we’ll get there through a combination of the three things that I talked about before. The markers for whether we’ve fully integrated the staff, I think, are going to be harder to see and harder to measure, but it’s something that we’re very sensitive to, and that we’re going to be spending a lot of time thinking about.

We’re actually hoping to write a brief report at the end of the first year for ourselves, for the various partners who supported us, and for folks like you who are just interested in how things went. I think it’ll be a very important document. I want to be honest and transparent about the issues and challenges we faced and where we met them and where we didn’t meet them.

That might be an appropriate time for us to speak again. You’re going to have to interview me again in a year.

RM: I think that would be great.


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