City deal with Germantown Settlement went sour

In the waning days of the Street administration, city officials concocted an elaborate scheme to aid Germantown Settlement, a troubled nonprofit organization with a well-documented history of fiscal mismanagement.

At the behest of the Mayor's Office, the city Redevelopment Authority fronted Settlement $78,000 to cover an unpaid bill from its auditor. The payment was to trigger the completion of an audit required to unfreeze needed federal funding. Settlement then would use that money to repay the RDA.

In the end, the scheme backfired. Despite the city's contribution, the nonprofit organization was unable to settle its account with the auditor. As a result, the audit was not completed, the federal money was not released, and the RDA was left short $78,000.

The sum is a pittance compared with the millions in taxpayer money now at risk as Settlement confronts multiple liens and lawsuits over back taxes, delinquent loans, and unpaid bills.

The episode, however, is an example of the willingness of public officials to continue to funnel money to the venerable social-service agency long after they had ample evidence that Settlement was sinking in a sea of debt created by its own mismanagement.

The payment was discovered as The Inquirer reviewed records kept by the city Office of Housing and Community Development (OHCD) concerning its dealings with Settlement.

At the time of the payment, Settlement and its subsidiaries were years behind on property taxes, owed almost $300,000 to the Philadelphia Gas Works, and were delinquent on multiple public loans. Settlement's most recent audit - in 2005 - reported it was operating with a $4.7 million shortfall.

Kevin Hanna, the city's secretary of housing at the time, said city officials were aware of Settlement's financial difficulties, but decided to help the nonprofit because "it had a plan and was working hard to solve its problems." It also was important as a social-service provider for the city, he said. At the time, Settlement had city contracts for about $1.2 million to provide a variety of social services in Germantown.

"Did we recognize they were in trouble? Of course we did," Hanna said. "Did we wish they weren't in trouble? Of course, we did. But cutting off funding when that funding was their primary lifeline would have killed them."

Similar arrangements, he said, had been made with other struggling nonprofit groups over the years.

In an e-mail exchange with The Inquirer, former Mayor John F. Street said he did not recall the arrangement and recommended contacting Hanna.

Emmanuel V. Freeman, Germantown Settlement's longtime president, chose not to comment.

Told this week of the payment and how it was made, City Controller Alan Butkovitz said it was wrongheaded and represented a failure of the Street administration to provide appropriate oversight.

"This was a very chummy, sympathetic relationship," he said, "when, in fact, the city is engaged in a business relationship with Germantown Settlement and is supposed to be vigorously protecting taxpayers' dollars. It [the city] should have been skeptical and not go out of the way to be helpful."

As troublesome, he said, was the willingness of city officials to "blow past all sorts of controls that are there for the very purpose of being early-warning systems."

"With all the millions of dollars that went to Germantown Settlement and it not to have the money to complete the audit, right there is a red flag," he said.

Today, Settlement and its subsidiaries face more than $2 million in liens for unpaid city, school district, state, and federal taxes dating to 2007. The U.S. Department of Housing and Urban Development has foreclosed on two of Settlement's apartment complexes for the elderly. The RDA has gone to court to reclaim $1.3 million it lent Settlement to buy the Germantown YWCA.

The city has canceled all its contracts with the nonprofit organization. The U.S. Attorney's Office is reportedly conducting an investigation of Settlement.

Freeman, who at 61 has been president of Settlement for 28 years, was charged in August with a summary offense for failing to make $11,668.83 in payments to the state unemployment compensation fund.

Though Settlement's financial failings were not quite as extensive in January 2008, the nonprofit had a well-established record as a deadbeat.

At the time, Settlement and its subsidiaries had multiple liens for unpaid gas bills and school district taxes. One of its major holdings, Wayneview Homes, was scheduled for a sheriff's sale because Settlement was delinquent on a $1 million mortgage.

Another outstanding obligation was the $78,000 it owed its auditor, Zelenkofske Axelrod L.L.C., for its fiscal 2005 audit. Though the audit had been completed and released, it had not been fully paid for.

Without the payment, Zelenkofske refused to complete Settlement's 2006 audit. Without the 2006 audit, Settlement was ineligible to receive federal funding, including reimbursement for contracts it had already completed.

In a letter to Street dated Oct. 29, 2007, Freeman explained the situation and asked the city to release federal money owed to Settlement so it could pay its debt.

Some time after Freeman contacted Street, Deborah McColloch, director of the OHCD, said Hanna had contacted her.

"We were asked by the Mayor's Office to be helpful to Germantown Settlement," she said in interview last week. "Kevin Hanna asked me to figure out a way to be able to reimburse Germantown Settlement."

Legally, the city could not, because the money owed to Settlement was federal and it could not be released without the 2006 audit.

McColloch said her office, with Hanna's approval, asked the Redevelopment Authority to directly pay Zelenkofske the $78,000.

In a Jan. 9 memo to Michael Koonce, then acting director of the Redevelopment Authority, McColloch asked that the payment be made with "non-federal funds." The memo said Settlement would reimburse the money when its federal funding was released.

The RDA was to make the payment because the city cannot legally pay a vendor with which it has no contract, McColloch said in an interview.

Ultimately, the payment was made and Settlement's debt on the 2005 audit was cleared.

At that point, Settlement's 2006 audit was to be completed and paid for by the nonprofit group, which had assured the city it had a plan for covering its costs.

But Settlement was unable to pay for the second audit, which was never finished.

Without that audit, no federal money was released and the RDA was not paid back.

McColloch said the RDA ultimately would be made whole, but by the city, not Settlement. She said the city had asked the RDA to submit $78,000 worth of eligible expenses it ran up on other city-related projects. The city will then cover those.

McColloch called the whole episode "distressing," but declined to question its wisdom in hindsight.

"If we had gotten the audit, things would have been fine," she said. "And Germantown Settlement had represented to us that the only thing preventing the release of the audit was this payment."