Braille Monitor June 2006
JWOD Exposé Reveals
From the Editor: For the better part of a year now members of the Senate have been threatening draconian overhaul of the Randolph-Sheppard (RS) and Javits-Wagner-O'Day (JWOD) programs, both of which were established to provide employment for disabled workers, albeit in very different ways. As we know, the Randolph-Sheppard Program is entrepreneurial in spirit and structure, enabling blind business people to operate food-service businesses of various kinds with some support services from the state licensing agency. The Javits-Wagner-O'Day program provides manufacturing and some service-delivery operations to hire disabled workers as hourly employees (typically not managerial). As long as at least 75 percent of the hourly workers are disabled, these businesses (almost always charities) qualify to receive contracts with the federal government to produce things or services that it needs.
Members of the Senate Health, Education, Labor and Pensions Committee have been urging reform of both programs. They think the blind Randolph-Sheppard vendors should hire more disabled employees, and they are disturbed at the high salaries the able-bodied JWOD managers are getting. At the moment it is not clear what is going to happen. Randolph-Sheppard vendors can currently boast that about 32 percent of their workforce are disabled people--a far more respectable percentage than any other group of employers except the JWOD charities, whose disabled employees are almost entirely line workers at the bottom end of the pay scale.
In early March the Oregonian newspaper ran a series of detailed articles that blew wide open the growing scandal of high managerial salaries and the successful efforts of a number of JWOD agencies to avoid hiring the severely disabled workers the act originally intended to provide for. It is important for Monitor readers to understand what is going on. We are pleased to report that the JWOD agencies that are members of National Industries for the Blind (NIB) have not been implicated in this scandal. When the Senate begins proposing changes to the RS and JWOD programs, it will be important for us to recognize where the problems are and what should be preserved. Here, reprinted with permission, are two of the articles that appeared on March 5 and 6, 2006, in the Oregonian. All rights reserved:
Charity Leaders Prosper as "Disabled" Is Redefined
Federal program to help the severely disabled draws scrutiny over executive pay as hiring shifts to a new class of subsidized workers
by Jeff Kosseff, Bryan
Denson, and Les Zaitz
March 5, 2006
When Congress created the nation's most ambitious jobs program for Americans with severe disabilities, the idea was straightforward and rich with compassion. Federal agencies would reserve contracts for small nonprofit workshops that hired epileptics, paraplegics, and the mentally retarded to make simple products such as mousetraps, blackboards, and first-aid kits. The disabled would gain a decent paycheck, some self-esteem, and a chance to learn skills that someday might land them a better job.
More than three decades later, the nonprofits increasingly are hiring workers who are mildly disabled, if at all, with aching backs, substance-abuse problems, and other maladies common in the American workplace. This new class of federally subsidized worker is getting the highest-paid jobs, while many of the most severely disabled toil for pennies an hour.
Their bosses are benefiting handsomely, with leaders at many of the program's biggest charities pulling in private-sector-style compensation as the new money rolls in. At least a dozen earn $350,000 or more a year, and average pay and benefits for top executives at the program's largest nonprofits have grown more than three times faster than their workers' pay.
The program's key requirement--that three of every four hours of work is performed by people with severe disabilities--is policed under what's essentially an honor system. Oversight is so weak that the biggest contractor, a Texas nonprofit, amassed $834 million in government sales despite repeated findings that it couldn't document many of its workers' disabilities.
This radical reordering of the government's priorities comes at a cost. Many of the most severely disabled workers, who labor at charities with shoestring budgets, have been left behind. "Like a lot of federal contracting, the big money drives it," said David Wiegan, who believes workers at his small McMinnville nonprofit are simply too disabled to win many of the contracts now offered by the program. He said some bigger charities are drifting away from their social welfare missions: "I think they get sucked in, and I think they lose their sense of what's right and wrong when they're tempted by a lot of big dollars." Called Javits-Wagner-O'Day after its founders in Congress, the program requires federal agencies to buy certain goods or services from nonprofits that employ blind or severely disabled workers. Prices are set by regulators and the nonprofits, which collaborate with federal agencies that set aside contracts for the nonprofits.
The program is administered like no other in the government. A presidentially appointed committee delegates much day-to-day oversight to two trade associations representing nonprofits. These groups collect up to a 4 percent commission on every contract they monitor, creating a basic conflict of interest: Booting a charity from the program cuts their own revenue stream.
Sales in the $2.25 billion program have doubled during the Bush administration, driven largely by the post-9/11 boom in Pentagon contracts for complex tasks such as sewing chemical-warfare suits or fixing battle-scarred Humvees. Delivering on those contracts requires a more skilled--and less disabled--workforce with salaries that are often comparable to the private sector.
Across the country about 300,000 blind or disabled workers hold jobs at small charities similar to Wiegan's, with most earning less than minimum wage under a federal law that allows them to be compensated based on their limited productivity. While many federal programs for the disabled have faced steep budget cuts, Javits-Wagner-O'Day continues to grow year to year and now employs more than 48,000 workers.
The Oregonian began investigating the program as part of a continuing series of reports examining the evolution of nonprofits that employ America's disabled workers. The findings, drawn from hundreds of interviews, thousands of pages of documents, and visits to more than a dozen charities in seven states, reveal a program that drifted far from its founding principles with little outside scrutiny or public debate about who is benefiting.
Periodic attempts to change Javits-Wagner-O'Day have floundered on opposition from nonprofits and their advocacy groups, which are skilled at lobbying against reforms. But pressure for change is mounting as some in Congress question whether nonprofit executives are cashing in at the expense of the disabled.
The program "is intended to benefit many persons with disabilities, not a handful of nonprofit executives," said Senator Mike Enzi, a Wyoming Republican who chairs the Senate Health, Education, Labor and Pensions Committee. Enzi held a hearing on the program last fall and will be an influential player this year as Congress considers updating Javits-Wagner-O'Day. He said he's concerned that small charities can't get contracts while "much larger nonprofits grow rich." More should be done to get disabled workers into mainstream jobs, he said.
That long-term goal--to train disabled workers so they can compete for jobs on the open market--has taken a back seat. Figures reviewed by the Oregonian show only 2,450 workers moved from Javits-Wagner-O'Day jobs into the regular workplace last year, a figure that has fallen despite the program's surge in growth. The new disabled Mike Davis is not the kind of worker lawmakers said they had in mind when they drafted Javits-Wagner-O'Day, but he owes his job to the program.
The twenty-nine-year-old mechanic, out of the Army on a medical discharge, found work at Skookum Educational Programs, one of the biggest charities in Javits-Wagner-O'Day. Weekdays he fixes Humvees and nineteen-ton military cargo trucks at Fort Lewis, Washington, tearing into engines battered by duty in Baghdad and elsewhere. Davis earns $24.56 an hour, including about $3 for medical benefits and retirement. He has a hearing problem--corrected by hearing aids--and backaches that he says made him unemployable elsewhere.
Congress envisioned helping a different class of veterans thirty-five years ago. With troops streaming home from the Vietnam War, lawmakers pondered expanding a small program that since the 1930's had set aside contracts for the blind. Their plan was to open the program to veterans with missing limbs, paralysis, or brain damage, plus twelve million working-age adults left unemployed by major disabilities.
President Nixon's chief disability-employment training official told lawmakers who would get the jobs. "We are talking about mentally retarded and the paraplegic . . . and quadriplegic," Edward Newman told Congress. He included "deaf people with severe psychomotor problems . . . and people with other kinds of neurological involvement such as people with severe cerebral palsy or epilepsy."
That definition is now archaic. With the acquiescence of regulators, nonprofits gradually have expanded the notion of severely disabled to include ailments never discussed when the law was amended in 1971. The additions include conditions such as alcoholism or chemical dependency, minor learning disabilities, limited English, nasal polyps, carpal tunnel syndrome, allergies, arthritis, and speech impairments.
The broadened notion of who is disabled, in combination with the surge in military spending since 9/11, has revolutionized many of the biggest nonprofits in Javits-Wagner-O'Day. It also has stretched the boundaries of the program's most fundamental rule: 75 percent of the work hours logged by contractors must be supplied by blind or severely disabled workers.
Skookum is a case study in the transformation. For years the bulk of Skookum's developmentally disabled workers made jump-ropes or sorted recyclables in businesses cultivated by founder Jim Westall. The jump rope business still occupies a room at the company's airy headquarters in Port Townsend, Washington, but the fact that it no longer turns a profit is of little concern.
In 2001 Skookum landed a five-year, $64 million Javits-Wagner-O'Day contract to diagnose and repair Army vehicles that overnight promised to double the nonprofit's annual revenues. When the Army later told Skookum that thousands of damaged vehicles were heading back from Iraq, Westall couldn't find enough disabled employees in a hurry to handle the load. So the government granted Skookum a three-month waiver of its disability requirement, Westall said. The waiver has expired, and the work goes on.
The contract now has 120 workers with pay averaging $20 an hour. At least one has a missing leg, though most others suffer learning, hearing, and physical afflictions, such as back and joint pain. Westall, a former special education teacher and Skookum's chief executive, acknowledges that workers at the Fort Lewis garage are higher functioning than many others in Javits-Wagner-O'Day. The nature of the work demands it, he said: "They have to be able to do the work, or the Army has no use for them. You have to know an axle from a gas cap."
Westall thinks the program
should be expanded to cover a wider range of workers, including perhaps battered
women. Until then, he said, meeting the program's standard of 75 percent disabled
labor boils down to a balancing act. "Move too far one way--and hire too
many people with too severe disabilities who can't do the work--and we lose
our contract," he said. "Move too far the other way--to this place
where we have all of these high-functioning people that can do the work but
(have) questionable disabilities--we lose our soul."
Skookum is hardly alone. Many of the biggest charities in Javits-Wagner-O'Day routinely use workers with modest disabilities. What matters, they say, is not the type of disability but whether it prevents them from holding a job outside the program.
One of the most successful is Fedcap Rehabilitation Services, a New York City charity that pays an average of $17.87 an hour to Javits-Wagner-O'Day workers. Fedcap, which supplies custodial crews for federal buildings, reports the program's third-highest average wage, mostly because the nonprofit pays union scale.
Like Skookum, the charity specialized in hiring workers with profound physical disabilities when it was founded seventy years ago. Now Fedcap workers include many with learning disabilities, mental illness, alcoholism, and substance abuse who are judged unemployable elsewhere, said Susan Fonfa, the charity's executive director.
"Just because you can't see it doesn't mean it's not real," Fonfa said. "We will get people with every disability possible, just about." Critics of this hiring trend say it's less a balancing act than a cop-out. Some charities are cashing in on the government's largess, they say, while smaller nonprofits with workers who are far needier can't get in.
At Wiegan's nonprofit in McMinnville, for instance, the majority of the 150 workers are mentally retarded, autistic, blind, or beset with other physical or developmental disabilities. Their problems are too severe to perform much of the work now being offered under Javits-Wagner-O'Day, Wiegan said. For years Mid-Valley Rehabilitation has tried to land a contract under the program, Wiegan said. The nonprofit turned down one offer to make military footlockers, he said, because the costs were too high. Any worker who can repair a Humvee has no business taking money under Javits-Wagner-O'Day, he said.
"It's beyond absurd," Wiegan said. "If they can do that work, they're competitively employable. It's crystal clear." Wiegan's nonprofit is more typical of those that employ the severely disabled. Because such workers are normally less productive, the law allows charities like Mid-Valley to pay less than the federal minimum wage of $5.15 an hour. About 300,000 workers fall into this category, according to U.S. Labor Department estimates. Even so about 70 percent of the nation's disabled adults remain unemployed.
When people with truly severe disabilities are lucky enough to land work under Javits-Wagner-O'Day, they're often paid a subminimum wage. To get a picture of how little these employees earn, The Oregonian analyzed earnings records for eight large contractors. They show that 1,644 employees with severe disabilities received a median wage of $1.93 an hour.
Megan Brixey is the type
of worker lawmakers envisioned helping when Congress expanded Javits-Wagner-O'Day.
The twenty-seven-year-old McMinnville resident has Down syndrome and a job shagging
lumber for $3.91 an hour at a wood-products company run by Wiegan's nonprofit.
Brixey said she dreams of magic--"Like Harry Potter," she says--wishing
that it flowed into her hands to make her a faster worker. Wiegan said the big
contracts and high pay for workers with mild disabilities send a blunt message
to his severely disabled employees: "They're not as important as the money."
Private Sector-Type Benefits
The money has been a boon to top executives at the biggest nonprofits. As sales ballooned under Javits-Wagner-O'Day, charity boards have adopted compensation packages and marketing budgets that resemble those of the private sector.
Nineteen years ago, a disability counselor started a tiny nonprofit jobs program deep in the heart of Appalachia with a small grant. Since then Terri McRae has built Advocacy and Resources Corp. of Cookeville, Tennessee, into a multimillion-dollar producer of baking mix, fortified vegetable oil, and other food for the government. The charity drew $50 million in federal contracts last year, making it one of the largest in Javits-Wagner-O'Day.
McRae's paychecks mirrored the charity's success. In 2004, as her nonprofit landed large contracts with the military and U.S. Department of Agriculture, her wages, deferred compensation, and benefits had grown to $518,835, up from $66,500 a few years earlier.
McRae readily defends her compensation. Her nonprofit pays market wages to all employees, including the executives, she said. Running a multimillion-dollar government contractor requires deep knowledge of many regulatory requirements, something that has taken years to develop, McRae said. "I'm telling you what--my job's a hard damn job," McRae said in an interview last summer. "And when I'm gone, I'm going to be really hard to replace."
The Oregonian analyzed tax forms for Javits-Wagner-O'Day's fifty largest contractors, which together account for about two-thirds of the program's sales. More than a dozen reported executives with pay and benefits exceeding $350,000 in 2004, the most recent year for which complete tax records are available. The list includes Bill Hudson, president of LC Industries Inc. in Durham, North Carolina, who made $537,787; John Miller, chief executive of Goodwill Industries of Southeastern Wisconsin, who made $444,405; and Terry Allen Perl, chief executive of The Chimes Inc. in Baltimore, who drew $704,175. The charities said salaries for all three were set by their board members based on pay at similar-sized operations.
The largest Javits-Wagner-O'Day contractor, an El Paso, Texas, company with $276 million in sales to the military and other agencies last year, reports no salary for its president, Robert E. Jones. Instead, the National Center for the Employment of the Disabled said it paid $4 million in 2004 to a management firm controlled by Jones's family trust.
Average pay and benefits for the top contractors' CEOs climbed 57 percent between 2000 and 2004, a period in which average hourly pay for their severely disabled workers increased 16 percent. The CEOs averaged $248,287 in pay and benefits in 2004, up from $241,164 a year earlier and $158,400 in 2000. By comparison, only a quarter of human-services nonprofits with budgets greater than $5 million gave their CEOs pay and benefits exceeding $155,520 in 2003, according to Guidestar, a national clearinghouse for charity data. The Oregonian's averages exclude two nonprofits: Mississippi Industries for the Blind, because it is run by the state, and the El Paso charity, because it reports only a management fee and not Jones's salary.
Few observers expect charity officials to take vows of poverty. But in recent years, controversy about perks, insider deals, and big executive salaries has prompted Congress to threaten a crackdown.
IRS rules require nonprofit boards to base executive salaries on a review of what's paid to comparable business leaders. Some of those familiar with Javits-Wagner-O'Day, including Fredric Schroeder, a former member of the committee that oversees the program, find the rising paychecks unseemly. "There is the clear appearance that people with severe disabilities are being paid low wages with no oversight of those wages and that executives are being paid astronomical wages," said Schroeder, who sat on the program's oversight committee during the Clinton administration.
The boom in contracts has fattened both salaries and the balance sheet at many Javits-Wagner-O'Day nonprofits. Net assets of the top fifty charities grew 60 percent between 2000 and 2004, with the biggest exploding by five times or more. Charities now fret over things like "brand identity." The trade association representing most of the program's nonprofits spent $500,000 on lobbying and $3 million on marketing and communications in 2004, according to tax forms and congressional records. Charity officials say the spending aims to boost awareness about the program's goals and to attract more federal business. But it also adds overhead. Supplies, marketing, management salaries, and other costs take up the bulk of the program's money. Only about 18 percent of the $2.25 billion spent in 2005 went to wages for the disabled.
The fifteen-member committee that oversees Javits-Wagner-O'Day does not police salaries, deferring instead to the IRS. Recently the program's growth prompted the committee to consider setting new governance and conflict-of-interest standards for nonprofits, which overwhelmingly have criticized the move as an intrusion.
Stronger oversight would
be a departure. When it comes to policing its key mandate--that contractors
use severely disabled workers for three-fourths of their labor--even top officials
concede they haven't aggressively monitored the nonprofits. Who's keeping watch?
Headquartered on the tenth floor of a bland high-rise near the Pentagon, the Committee for Purchase from People Who Are Blind or Severely Disabled is one of the smallest and most unusual agencies in the government. By law the panel of fifteen presidential appointees--four representatives of blind and disabled workers, and eleven federal government managers--decides which federal contracts are set aside under Javits-Wagner-O'Day. Their choices, which are seldom reviewed by Congress, can steer hundreds of millions of dollars to obscure nonprofits.
In an arrangement with few parallels in government, the law allows the presidential committee to assign most contract management duties to two trade associations, the National Industries for the Blind, or NIB, and NISH, formerly known as the National Industries for the Severely Handicapped. For years government regulators visited charities to determine whether they employed enough severely disabled workers. Employees of the trade groups also visited the charities to help them comply with the labor rules. But in 2001, with fewer than thirty staffers tracking more than $1 billion in contracts, the agency delegated regular site inspections to the trade associations.
The decision was made without significant public debate or even a committee vote. "With my staff of twenty-nine people, NIB and NISH can put more resources against that," said Leon Wilson, executive director of the presidential panel. "I still believe that was a better path for us to take." On paper the panel still has broad authority to cut off contracts from nonprofits that fail to meet the program's requirement that 75 percent of all labor be performed by workers with severe disabilities.
In reality it's an honor system with little enforcement. Nonprofits file annual reports, but NISH officials visit only once every three years. They randomly sample employee files to check the ratio of severely disabled labor hours. If paperwork is complete, the nonprofit passes.
Robert Chamberlin, NISH's chief executive, said his staffers do not interview workers to verify their disabilities because of restrictions set by federal health privacy laws. More important, Chamberlin said, NISH does not have the legal authority to conduct audits or investigations of the program's contractors.
"They have specifically told us, ‘You're not auditors,'" he said. "‘You're not investigators. Your mission is to go in an assist mode.'" The tiny federal committee does visit new nonprofits or those known to have problems. But officials acknowledge that no one regularly audits longtime participants in the program.
The trade groups have an incentive to resolve issues amicably. The charities pay them up to 4 percent on each contract. The commissions helped boost NISH's revenue 86 percent over four years, to $58 million in 2004. The trade associations "live on the commissions that come from the contracts that go to these nonprofits," said Schroeder, the former committee member. "So are they genuinely interested in pulling the plug on a contract that appears to be unreasonably operated? . . . I'm not suggesting evil, but there's no truly independent oversight."
Rules of the Javits-Wagner-O'Day program leave room for some interpretation of who qualifies as "severely disabled." They say a worker must suffer from a "severe physical or mental impairment" that so limits their ability to walk, talk, or work that the person is unable to "engage in normal competitive employment."
The law specifies a measurable standard for blindness--20/200 vision in the best corrected eye. As such, there are few questions about workers at the seventy-four nonprofits represented by NIB, the trade group for the blind. But the range of other disabilities is much less clearly defined. NISH, which represents 553 contractors, only demands its charities document that workers have disabilities preventing them from finding other jobs.
The program's lax oversight can be seen in the committee's dealings with El Paso's National Center for the Employment of the Disabled, the program's biggest contractor.
Officials with the committee and NISH began examining in 1999 whether the nonprofit used enough labor from severely disabled workers. By May 2000 officials on three separate occasions had found inadequate documentation to back up disability claims. The problems did not stop the nonprofit from building its business year after year. Last spring an anonymous complaint triggered a visit from committee investigators, who found payroll reports indicating only 39 percent of the nonprofit's labor was from severely disabled workers. Still it wasn't until January that the committee ordered NISH to send a compliance team to El Paso to review all the nonprofit's records.
Since then the charity's largest customer--the Defense Supply Center in Philadelphia--said NISH alerted commanders of "some concerns" about whether the nonprofit was using enough severely disabled labor. A spokeswoman said Friday that the center last week "ceased placing orders with NCED" until the concerns are resolved. Separately charity officials are scheduled to appear before the committee Thursday to address the workforce issue.
Not since the early 1990's
has the committee or NISH released an accounting of the types of disabilities
in the Javits-Wagner-O'Day workforce. The Oregonian sent surveys to
the fifty largest contractors in an attempt to categorize disabilities, but
only six responded, too few for a reliable sample. NISH has worked for months
to compile such a report, but results were not ready as of last week.
Linda Merrill, chief executive at Envision, a Kansas nonprofit that primarily employs blind workers, said it's time for "severely disabled" to be defined more strictly. "We're kind of joking among ourselves," said Merrill, "that instead of National Industries for the Severely Handicapped, it's National Industries for the Severe Hangnail and Hemorrhoids." NISH's Chamberlin acknowledged that nonprofits have an incentive to employ people who have higher productivity, but he does not blame that on the federal program. Customers increasingly are demanding high quality at low prices, he said.
"The government is
tough," Chamberlin said. To address the problem, he said, NISH is attempting
to find more business in areas such as document destruction and laundry, which
are better suited to people with more severe disabilities.
Momentum for Change
Powerful forces on Capitol Hill are beginning to recognize problems with Javits-Wagner-O'Day, foreshadowing a showdown between lawmakers and charities in the program. Two U.S. senators have introduced a bill that would reserve some federal contracts for private businesses employing disabled workers. And a Senate committee held a hearing in October, taking testimony about soaring executive salaries and misdirected resources.
Enzi, the Wyoming senator, said the program should do more to move workers into mainstream jobs. As it stands, only 5 percent of the severely disabled workers in the program move to private-sector jobs, down from 7 percent in 2000. Wilson said workers are reluctant to leave nonprofits because they are friendly places with wages and benefits that are often superior to comparable private companies.
Newman, the former Nixon administration official, said policymakers expanded the program in 1971 hoping to train workers and move them out of low-paying "sheltered workshop" nonprofits and into the regular workforce. Now he sees a reversal. "They are rebuilding a sheltered workshop mentality, when the efforts of the '60's and '70's was to help people with disabilities be able to join the mainstream of the work world," said Newman, now a professor at Temple University.
If history is any guide, changes to the Javits-Wagner-O'Day program are likely to be met with great resistance by many of the biggest charities. The chairman of the presidential oversight committee, Steve Schwalb, said alarm about rising executive pay led members to propose a $207,000 compensation cap in late 2004. The figure seemed reasonable because $207,000 was the top compensation for federal managers, most of whom run agencies larger than the program's nonprofits.
What followed was a roar of protest from nonprofit executives, board members who set their salaries, and some of their lawyers. Schwalb's committee withdrew the proposal. But after the Oregonian last fall reported on rising executive salaries and Enzi's committee held hearings, the presidential panel proposed more stringent governance standards for nonprofits along with a possible compensation limit, though it has not specified a number.
Chamberlin, who as head of NISH earned salary and benefits totaling $299,565 in 2004, has been among the opponents of a salary cap. The trade group had argued against the $207,000 pay limit, calling it discriminatory and unnecessary.
One supporter of a compensation limit is John Murphy, who earned $130,310 in pay and benefits as the head of Portland Habilitation Center in 2004. The nonprofit provides janitorial services for federal buildings and is Oregon's biggest Javits-Wagner-O'Day contractor. Murphy, who sits on the NISH board of directors, said it will be difficult for the program to determine a maximum salary. But it's needed, he said. "The committee should make some judgments and come down on organizations where it just stinks," Murphy said. "The reputation of the program is at stake."
Texas Charity a Launchpad for Entrepreneur's Empire
Robert E. Jones takes a faltering nonprofit under his wing and reaps rewards under a federal program aimed at benefiting those who are severely disabled
by Les Zaitz, Jeff Kosseff,
and Bryan Denson
Monday, March 6, 2006
EL PASO, Texas--Robert E. Jones arrived in this hard-luck border city two decades ago, trailed by a bankrupt business, angry creditors, and millions of dollars in court judgments against him. Today he oversees a business empire that includes garment factories, downtown office towers, and a hospital. The family trust he controls recently claimed a net worth of more than $40 million.
How did he do it? Charity. In just nine years the nonprofit Jones directs--the National Center for the Employment of the Disabled--has landed $834 million in exclusive federal contracts, emerging as the Pentagon's primary manufacturer of chemical-warfare suits.
Today $1 in every $10 spent
through the federal government's most ambitious program to employ severely disabled
workers flows through the charity. Yet the government repeatedly has found that
NCED couldn't document that it met the program's primary mandate--that severely
disabled workers provide three of every four hours of labor at participating
nonprofits. Last week the U.S. military took the rare step of suspending all
orders with the charity until "concerns" about the makeup of its workforce
Over the past decade Jones has amassed a fortune in a rags-to-riches journey that took him from a messy business failure in Houston to last year's El Paso "Entrepreneur of the Year" honor. The charity paid his management firm $14 million from 1999 to 2004, according to its tax returns. And it has invested or lent $5 million to for-profit businesses in which Jones held a significant interest.
The story of NCED illustrates many of the shortcomings in the federal Javits-Wagner-O'Day program, which last year set aside $2.25 billion in government contracts for nonprofits that employ the severely disabled. An investigation by the Oregonian found skyrocketing executive pay in the program at the same time nonprofits increasingly hire workers with lesser disabilities. Oversight of the program is essentially an honor system that allows charities to go for years without being inspected to see whether they're using the required amount of severely disabled labor.
In NCED's case the charity repeatedly assured regulators it was in compliance. But one internal record obtained by the Oregonian represents that from 2002 to 2004, fewer than half the workers were disabled. Another document, a quarterly report summarizing hours worked by each employee, shows hundreds of workers with only "English" listed as a "disadvantage."
Regulators independently established last year that the charity was combining "disabled" employees and "disadvantaged" workers, a classification that doesn't meet the federal labor standard. But that finding came years after questions first arose about its labor documentation. By that time NCED had built its annual government business to $276 million. The figure is more than thirty times the sales logged by the thirteen Oregon charities in the program.
Responding to detailed queries from the Oregonian, the charity issued a two-paragraph statement saying it complied with all relevant government rules. Jones did not respond to written questions about the nonprofit's labor ratios, charity operations, and extensive dealings with his private business interests.
In an initial interview last year, the sixty-year-old Jones said he's been successful because he's taken a different path than most charity executives. "I'm a hard-core businessperson, not a born-again do-gooder," Jones said. Federal tax law allows the nation's 820,000 public charities to strike deals with their executives and directors and their for-profit businesses, but only if fair value is paid for the goods or services.
Late last year the Internal Revenue Service visited the offices of a trade group representing most of the Javits-Wagner-O'Day charities to discuss NCED, a federal official familiar with the visit said. Jones also has drawn previous IRS scrutiny for dealings with the charity, according to two of the nonprofit's board members and an email the Oregonian obtained.
In 2004 a charity accountant said in the email that two IRS officials told him they were concerned about the "egregiousness" of "acts of self-dealing" at the charity in 1999 and 2000. The accountant, Richard Speizman of KPMG, wrote that the IRS also questioned a "lack of independent oversight" by the charity's board.
Jones recently paid "a substantial sum" to settle a long-running IRS audit of the charity for those years, according to John Oblinger and Stephen Benson, members of the charity's board of directors. Neither Jones nor the IRS would disclose the amount. Speizman indicated in the email that the IRS was discussing the charity's tax-exempt status. Losing it would disqualify the charity from its federal contracts. KPMG officials declined to comment on behalf of the firm and Speizman.
Last spring an anonymous complaint prompted the committee of presidential appointees that oversees the Javits-Wagner-O'Day program to re-examine whether the charity was using enough severely disabled workers. In an email obtained by the Oregonian, the program's executive director fretted that he didn't need a "scandal" involving the program's largest contractor. Nonetheless, the committee ordered a comprehensive investigation of the nonprofit's workforce and has summoned charity officials to a hearing Thursday to answer questions.
Back in El Paso, Jones
remains a commanding figure, lauded for his work with the disabled. He has cemented
that stature with a wide array of charitable donations, giving to the YMCA,
public schools, and other causes. The nonprofit is one of the city's largest
employers, listing 4,000 employees. Jones speaks frequently of his passion for
charity. "Doing the right thing has been a wonderful godsend for the community,"
he told the Oregonian. "But it's mirrored back to us and magnetized
back to us as being a white knight as a corporate citizen."
Starting Over in El Paso
Little in Jones's past predicts this emergence as a charity operator and big federal contractor. The burly six-foot-four Texan got a start in business as an electrical contractor in Houston. Stacey Inc., a company he founded, grew rapidly, then went bankrupt in 1980, eventually saddling Jones with $3.9 million in court judgments from creditors. Court records show only one judgment, for $35,375, was ever paid.
The U.S. Labor Department in 1983 sued Jones, accusing him of "repeatedly" using the Stacey employees' profit-sharing plan as his "personal banking account." He agreed two years later to pay the federal government $506,680 to settle the case; court records do not show the sum was paid, and the Labor Department says it no longer has records relating to the judgment.
Jones made a fresh start in El Paso, where he managed a business park and involved himself in downtown development. In 1995 the owner of the business park, Evern Wall, asked him to look over operations at a struggling charity. The National Center for the Employment of the Disabled was in bankruptcy. Its major contract, making cardboard boxes for the General Services Administration, could not support its workforce of fifty people.
Jones saw promise in the nonprofit and said he would try to save it--but not on a salary. Instead, he struck a deal that gave him a personal stake in its success, with the nonprofit paying an annual management fee to a firm owned by the Jones Family Trust. The beneficiaries of that trust are his children, Jones testified in a civil suit. He said he administers the trust with his sister and brother-in-law.
The management fee initially was set at 1 percent of the charity's revenue, plus $5,000 a month. The deal later was doubled to 2 percent of revenues plus 5 percent of each year's increase in net assets, an arrangement that proved lucrative as the charity began buying factories and for-profit businesses. The formula has worked well for Jones. JFT Management was paid $294,300 in 1997. By 2003 and 2004, it was earning more than $4 million annually, or about $75,000 a week.
Jones told the Oregonian his personal tax return shows he takes home about $500,000 a year for all his business ventures. The majority of the management fees, he said, are invested in "socially correct" enterprises in health care and education. Jones said he approached the work with trepidation when he took over the nonprofit in 1995. "My great dread was, God, working with disabled people, what's this going to be like?" he said. "I wasn't a very good or caring person in those areas."
The factory was dismal, he recalled. "My first mission was just cleaning the place up," Jones said. "It was filthy. . . . The idea of the company surviving was one in one thousand." Jones brought in new directors for NCED's board, including his brother-in-law, and pulled the nonprofit out of debt by pressing suppliers to discount outstanding bills and winning new contracts to make boxes.
A break came in 1997, when the biggest trade group that helps run the Javits-Wagner-O'Day program offered the El Paso charity the chance to sew chemical-warfare suits. The operation owned only a few ancient sewing machines, but after Jones won a $9 million contract to make suits for the Marine Corps, he cobbled together the needed equipment and factory space, according to Jones and the nonprofit's board minutes.
By 2000 the charity held
$37 million in government contracts--a dramatic turnaround for a nonprofit that
just five years earlier had earned less than $3 million in revenue. But that
was just the start.
An Opportune Juncture
Jones had stepped into exactly the right business at exactly the right moment. The 1995 nerve gas attack on the Tokyo subways put the issue of preparedness on the front burner at the Clinton White House. Inside the Pentagon worries grew about the military's ability to cope with chemical, biological, and nuclear attacks.
Chemical-protective suits are sewn from a permeable fabric lined with carbon beads. Making them is exacting work. Because exposure to even minute amounts of nerve agent can be fatal, military contracting officers keep a close eye on the quality. Jones said the quality demanded is "twice that required by commercial products." The suits, which cost an average $241, also offer an attractive business opportunity. Because the protective fabric degrades quickly, they must be replaced within six weeks once used.
Jones's foray into chemical-suit manufacturing made economic sense. El Paso's unemployment rate had topped 11 percent, double the national rate. The city, once a mainstay in U.S. textile manufacturing, was awash in skilled workers who lost jobs as the garment industry moved overseas. Hiring those workers could make the nonprofit immediately competitive. But rules of the Javits-Wagner-O'Day program required that three-quarters of the work be performed by blind or severely disabled people. Jones told the Oregonian that up to 20 percent of El Paso's laid-off workers had severe disabilities.
A local official whose agency helped him with recruiting said the call went out for sewing machine operators who faced "barriers." Martin Aguirre, the former chief executive of the Upper Rio Grande Workforce Development Board, said the "barriers" did not have to be physical disabilities. Charity officials told Aguirre's agency it was sufficient to be "economically disadvantaged" and struggling with language or literacy, he said. Jones said the jobs paid an average of about $9 an hour, including benefits.
From 1997 to 2005, a period in which the nonprofit's sales under the program totaled $834 million, Jones signed annual reports required by the government declaring that severely disabled workers were providing at least 75 percent and as much as 97 percent of the labor. But an internal document obtained by the Oregonian states that a top charity executive informed Jones that less than half the workforce was disabled during three of the years.
The document, a 2004 handwritten note to Jones from Ernie Lopez, the nonprofit's chief operating officer, summarized NCED's labor history in the years 2002, 2003, and 2004. "Bob, these are the ratio numbers that I was telling you about on the phone," the note says. According to the note, the nonprofit's percentage of disabled workers was falling, from 44 percent in 2002 to only 38 percent in the spring of 2004. The note counted "disadvantaged" workers--33 percent in 2002 rising to 38 percent by April 2004--to reach totals slightly above 75 percent each year.
A quarterly employment report from 2002, also obtained by the Oregonian, included 345 workers whose only disadvantage was designated as "English." Nearly 80 percent of the hours listed in the report are logged as "disabled/disadvantaged." Excluding those with only an "English" disadvantage, however, drops the figure to 43 percent.
Jones, Lopez, and the charity's
board declined to answer questions about the report or other internal documents.
Oversight and Assistance
The chemical-warfare suits have provided a steady revenue stream for the charity. Before orders were suspended last week, the nonprofit was making 70 percent of the military's suits, according to the Defense Supply Center in Philadelphia. It took years for questions about the makeup of NCED's workforce to slow that buildup of business.
In an unusual arrangement for the federal government, the Javits-Wagner-O'Day program is overseen by a small federal agency that disburses contracts and enforces rules. The committee, in turn, delegates some duties to two nonprofit trade groups representing charities. The biggest, known as NISH, represents the bulk of the 627 charities in the program.
Both the oversight committee, with twenty-nine employees, and NISH have said their primary focus is on helping charities stay in the program rather than sanctioning them. Robert Chamberlin, the chief executive officer of NISH, said the trade group's staffers work to "assist" contractors in following the law.
Even so, a charity can lose its federal contracts unless three-quarters of its labor is performed by people with severe disabilities such as mental retardation or partial paralysis. Regulators say lack of English fluency isn't a severe disability. Nor can charities count "disadvantaged" workers to reach the 75 percent ratio, regulators say. "If they don't qualify as severely disabled, they shouldn't be counted," said Steve Schwalb, chairman of the federal oversight panel, which carries the unwieldy name of Committee for Purchase from People Who Are Blind or Severely Disabled.
Both the committee and NISH have examined the El Paso charity's disability ratios. In February 1999 a NISH inspector visited NCED and found inadequate paperwork to prove workers' disabilities. "Individuals without the required medical documentation must be considered nondisabled," Victor J. Dennis, a NISH official, warned Jones in a follow-up letter that summer.
Later that year someone purporting to be an employee sent an anonymous letter to regulators alleging misconduct at the nonprofit. Among other things the letter asserted that workers were being sent to company-approved doctors "so we can keep our percentage of disabled workers high."
Following up that July, a committee compliance officer, Lou Bartalot, wrote in a memo that allegations in the anonymous letter ought to be taken seriously, partly because Jones is a "fast-talking, wheeler-dealer type of businessman." But Bartalot said the mix of allegations in the letter made the case daunting. "Neither NISH or the committee staff has the expertise necessary to really investigate this type of claim," he wrote.
Nonetheless, Bartalot and another committee official went to El Paso and also found documentation problems. Jones responded that his charity was shoring up its files and putting workers through a new round of physicals. "We have gone to great lengths and spared no expense in complying," Jones wrote in one letter to the committee. "There is no doubt that the reported percentage of disabled in our direct labor force is accurate."
Less than a year passed
before another review turned up "serious deficiencies in the medical documentation,"
according to a report by Peter Brandom, a program analyst with the federal committee.
Some workers recorded as having severe visual impairment wore glasses or contacts
that gave them 20/15 vision--better than normal. Workers aren't severely disabled,
Brandom wrote, unless vision in the best-corrected eye is 20/200 or worse. Some
documentation indicated "the individual has no disability," Brandom
added. Still other medical records provided no proof that the condition, such
as high blood pressure, was severe enough to qualify under the program.
Once again, the charity promised to make changes. It appointed an El Paso doctor to make sure medical documentation was adequate, and it hired a local health care company to maintain files and make sure they reflect "full compliance."
Regulators next returned
to El Paso in 2002, when a NISH inspector reviewed 20 of 959 worker files and
concluded the charity was complying with the rules. It wasn't until three years
later--a period in which the nonprofit's government contracts doubled--that
a second anonymous letter triggered more rigorous attention. The complaint last
spring alleged that only a fraction of the nonprofit's workforce was disabled
and asserted that doctors working at two clinics linked to the charity were
providing documentation for their disabilities. The new letter prompted the
committee's executive director, Leon Wilson Jr., to order a review. Though skeptical
of the allegations, Wilson sent a June 13, 2005, email to Schwalb saying, "We
don't need a scandal" with the program's largest contractor.
Committee officials visited El Paso and found an internal document indicating that only 39 percent of the nonprofit's labor came from severely disabled workers. Regulators said they didn't think the nonprofit was "trying to hide anything" but noted "problems" with counting "disadvantaged" workers as severely disabled.
More recently a committee spokeswoman said NCED in fact had lumped the two categories together. After another visit in December, the committee confirmed that the charity's ratio of disabled labor could not be higher than 60 percent and that its 2005 filings with NISH "might not be accurate." "This question of accuracy is no minor problem," Wilson wrote in a January letter to NISH ordering a complete review of the charity's files.
Officials conducted the review and in mid-February notified the Defense Supply Center in Philadelphia, which manages military contracts with NCED, that the El Paso charity "may be non-compliant" with federal labor requirements. Last week the center suspended further orders to the charity until the committee settles the issue.
Diana Stewart, a Defense
Supply Center spokeswoman, said Friday that officials at the supply center couldn't
recall another instance when orders to a nonprofit were suspended. The decision
immediately affected a new order for chemical-warfare suits, she said. Details
of that contract were not available. Marc Schwartz, an NCED spokesman, said
late Friday that the charity had not been informed of the military's action.
Other Business Ventures
In 2003 a gleaming boutique hospital opened its doors on El Paso's East Side. With its state-of-the-art equipment, Physicians Hospital was poised to claim its share of the local health care business.
Among its major financial backers was the National Center for the Employment of the Disabled, which lent the venture more than $2 million and bought $3 million in stock, records show. The hospital lost money in 2004, its first full year. But if it eventually prospers, the El Paso charity would reap the benefits. So would Jones.
The deal is one of several in which Jones the charity leader helped Jones the businessman. Records show that Jones Family Trust is a shareholder in the for-profit hospital, and that Jones serves as chairman of the hospital's board. Tax returns for the charity say Jones and two other directors have "control" of Physicians Hospital.
Federal tax law allows
charities to do business with directors, officers, and other insiders so long
as they don't unfairly benefit. The IRS advises charities to negotiate such
deals openly and at a fair value. Some states have tougher laws. In Texas charities
also are prohibited from making loans to directors, and loans to businesses
controlled by a director are restricted, the state attorney general's office
Internal records and tax returns show that NCED repeatedly has lent money to the Jones Family Trust or its related management company since 1997. On October 9, 2003, Jones signed a $1.5 million check from the nonprofit to his management company dated with the handwritten notation that the money was a loan against future management fees. Jones is a director as well as president of the charity.
The nonprofit's 2004 tax return, the most recent available, reported that the Jones Family Trust owed the charity $2.5 million. Other records show the nonprofit has financially supported an El Paso air-charter business in which Jones holds an interest.
Federal records show that the nonprofit helped ATI Jet Sales LLC buy two new Lear jets. Lyle Byrum, ATI's manager, said the company used a $1 million certificate of deposit owned by the charity as collateral for the loan that financed the purchase of the two jets. Records show the Jones Family Trust lent the company an additional $591,000 to help buy the jets, and Byrum said the trust was a "business partner" in the venture.
The charity also bought seats from the charter company. In 2004 it advanced ATI $200,000 for "prepaid airfare" and a "retainer for flight services." Byrum said the charity's executives have used the jets to travel around the United States. "NCED got a good deal," Byrum said. The charity got a top-notch charter company, one of the safest in the business, at a good rate, he said.
Under Jones's leadership the charity also struck several land deals with Jones or his family trust. Unlike many states, Texas does not require reporting of purchase prices in public records, so it is difficult to trace the value of specific transactions. In 1998 the nonprofit bought a condominium next to a horse track in the mountain resort town of Ruidoso, New Mexico. The same day Jones signed the deed transferring the property to the Jones Family Trust. Records do not show what the trust paid for the condo.
That same year Jones negotiated to buy a sportswear company and building in El Paso for his charity. Under the deal the two men selling the building passed $266,666 of the $1 million they received from the nonprofit to two Jones-related entities, New Sahara Inc. and the Jones Family Trust. The arrangement was described in escrow documents provided by one of the sellers.
Board records show that NCED's directors approved the acquisition. It is not clear whether the board was aware of the payments to New Sahara and the trust; board members declined to answer questions about the transaction. Two of the nonprofit's board members told the Oregonian that they were unaware that Jones's businesses had borrowed money from the charity. Despite the fact that tax returns are publicly available, the two said the board never had been shown the returns.
"NCED has never made any loans to Bob Jones," said Benson, a New Mexico business consultant who has been on the board since 1997. Oblinger, a retired Army general named to the board four years ago, said he believed the arrangements were the other way around--that Jones was lending money to the nonprofit. The charity's financial records show that Oblinger has a point. In several years tax returns list unpaid fees to Jones's management company as loans to the nonprofit.
How much Jones has earned
from his various charity-supported business deals is hard to determine. But
in 2004, as part of a land deal with the El Paso schools, he allowed local officials
to examine a financial statement, which they said showed a net worth of $40
million for the Jones Family Trust, then twelve years old. Margaret Gallardo,
a school district spokeswoman, said Jones reclaimed all copies.
Nominating itself for a national award several years ago, the charity offered its own appraisal of Jones's success. "A bear of a man," the charity called him, "steeped in tough management practices."