December 13, 2016; Alaska Dispatch News

The challenge of outsourcing government services to private nonprofit organizations is a two-way street. Previously, Nonprofit Quarterly wrote about New York City’s nonprofit government contractors who couldn’t make ends meet. But, risks can also fall on a government agency that outsources services to a nonprofit with questionable business practices and then supports them with taxpayer funds.

An article in the Alaska Dispatch News tells the tale of the city of Anchorage signing a no-bid contract with Alaska WorkSource last spring to find and hire homeless day laborers. The nonprofit had been in existence for two years.

A former real estate manager, Darryl Waters, runs the organization, which calls itself a “nonprofit providing employment training, work ethics, and life skills to people with a history of homelessness, jail and drug addiction.” The city told the paper it could find no other organization offering the same set of services along with access to addiction treatment and the ability to serve the homeless.

The city council authorized the contract without discussion. Later, the city began to notice discrepancies. Last month, it discovered that Tutan Recovery Services, a for-profit substance abuse counseling business run by Waters’ wife, Eydie Flygare, was housed in the same building as the nonprofit. Since the city was paying the nonprofit’s rent the net result was that taxpayers were paying the rent for a private business. The city also found that Alaska WorkSource was conveying public funds for the “work-van” program to Flygare’s company, “raising questions about who was supervising the operation.”

The project was one of several initiatives spearheaded by Mayor Ethan Berkowitz in his first months in office to reduce homelessness. But, the city ombudsman says the contract demonstrates what can happen when city business is rushed.

Participants in the work-van program, which hired homeless people to clean up city streets and public spaces, said it was helping them. The Dispatch interviewed several of them to get their personal stories, and all had generally positive experiences.

City officials pointed out that the relationship between Alaska WorkSource’s experimental work-van program and the treatment for substance abuse by Tutan was critical to its success, but the paper says the mayor failed to tell the council (called the Assembly in Anchorage) about the close relationship between the two, describing it only as a “partnership.”

After being alerted to Tutan’s use of the building by a reporter, the city ombudsman concluded that it wasn’t appropriate for any business other than Alaska WorkSource to make use of a building the city was paying for without written permission: “(Waters) got this lease as a nonprofit, and then he moves in his wife’s for-profit business…It doesn’t pass the red-face test.”

At that point, the council asked the ombudsman to investigate further. Waters told them he thought he was allowed to sublease the space and that he and his wife had made large investments in leasehold improvements. The below-market lease with the city required Alaska WorkSource to renovate the building. Now, there is a new lease, and Tutan pays monthly rent to Alaska WorkSource, which then passes the rent on to the city.

The Dispatch News says that “of the Anchorage nonprofits that got grants about a year into the mayor’s new administration, WorkSource was by far the least well-known…all [the other nonprofits] post annual reports, tax documents and audited financial statements online [but Alaska WorkSource does not].”

Public records show Waters has run several real estate-related businesses over the years, some of which were subject to lawsuits and fines for a variety of reasons. Research by the reporter revealed that Alaska WorkSource allowed its worker’s compensation insurance to lapse while it held the city contract, which would have meant that the “work-van participants would not have been protected against the medical costs of accidents while cleaning up street corners.”

The future of the city’s work-van program is iffy, says the Dispatch News—there is not enough funding to resume the project, and there are no plans to write another contract at this time.—Larry Kaplan