Thursday, December 20

Part 2: Second Mile's Financials Don't Add Up

A Comparison Between The Second Mile's 2006 Annual Report and its IRS 990 Shows That The Organization May Have Overstated Expenses -- Deceived Donors

This is the second installement of a mult-part series looking into The Second Mile's (TSM's) financial matters, in an attempt to follow the money in the Sandusky Scandal.

In the last installment, TSM's revenues didn't add up. There were discrepancies between what was donated, reported to donors, and reported to the IRS.  Based on the analyses, it is possible that TSM had between $400,000 and $1,900,000 in donations that went unreported to the IRS and/or donors in 2006.

Let's take a look at how  TSM handled their checkbook and managed their programs.  Was the money donated to TSM use to help the youth of Pennsylvania or was it used for something else?

Using the publicly available 2006 Annual Report and the IRS 990, the first issue is that Management and General (M&G)expenses, which include compensation is understated.  Compensation and benefits at TSM totalled over $1.2M in 2006 and made nearly 60% of the charities expenses, yet M&G is reported at $283,207.  The second issue is that the costs for some of the programs appear to be inflated for the type of services delivered. 

Management and General Expenses (M&G)

M&G expenses are those expenses that cannot be allocated to specific programs.  These expenses include administrative portions of salaries, rents, utilities, and miscellaneous expenses.  The Second Mile reported M&G expenses of $248,208 to the IRS, while reporting $283,207 to its donors.  

While the report to donors overstates the Management and General expenses claimed to the IRS, the more interesting fact is that the total compensation, before being allocated to various programs, totalled $1.26 million, or nearly 60% of the Second Mile's operating costs.  However, this number was not visible to the donors because compensation costs were allocated against the the various programs (see below).

 

In 2006, the top officers at TSM (Jack Raykovitz, Katherine Genovese, Henry Lesch, Marc McCann, Sean Saunders, and Jerry Sandusky) combined compensation totalled $521, 977 according to the IRS 990. However, only $81,427 of the amount was attributed to Management and General expenses, while $331,977 was allocated to Program Services and $108,573 to fund raising.   However, adding the salaries of the top officers listed on the IRS 990 falls about $200K short of the half million plus reported.  As we stated earlier, the numbers don't add up.

Additionally, TSM paid out another $630,010 in compensation (it is not clear who was paid on the IRS 990), but only $98,282 was allocated to Management and General expenses, while $400,686 was allocated to Program Services and $131,042 to Fundraising.  There were approximately 19 people covered by this compensation expense according to the math from the IRS 990, averaging out to approximately $33K per employee.  These employees are not listed on the 990 and we could not verify who they were before publishing this post.

Foster Care

The expenses from the Annual Report are shown at right.  The first major discrepancy is Foster Care ($199K)  is not reported as one of the major programs on the IRS 990, while the Leadership Institute ($162K) is reported.  That is another indication that something is not quite right with the expenses because the largest of the expenses typically appear on the 990.

According the Annual Report, Second Mile's foster care activities were aimed at recruiting and retaining foster families in partnership with Children and Youth Services agencies.  The foster care activities consisted of rewarding families for program participation by sending them on day trips to local amusement parks and other recreational events.  In addition, the families were also provided with complimentary dinners to Hoss's Steak and Seafood restaurants.

Carol Smith, director of Centre County Children and Youth Services, in an interview with the Pittsburgh Post Gazette, stated that her agency's dealings with The Second Mile were minimal -- the nonprofit had provided plaques and restaurant gift certificates to CYS foster parents who reached certain milestones of service.

In 2006, 55 recreational events were conducted with 3,800 foster families participating. One hundred and fifteen foster families received the free dinner.  However, both the IRS 990 and the Annual Report concurred: Hoss's, Allenberry Playhouse, Knoebels Grove, Hersheypark, and other venues made in-kind donations to support the activities, that would have defrayed or completely covered the costs of these activities.  Also, in-kind donations were made by restaurants, transportation companies.  All told, in-kind contributions to TSM totaled $364,741.

Given the fact that foster care was not listed as a major program expense on the 2006 IRS 990 and has not been reported as a major expense since 2000 (when the cost was $46,426), it appears that this cost may be overstated.

Friend/Friend Fitness

The Friend and Friend Fitness programs are staffed with volunteers who serve as mentors and workout partners, respectively. 

The Friend Program provides a supportive environment for approximately 500 elementary school children who participate in activities with collegiate mentors from Penn State, Millersville, Lock Haven, and Villanova Universities.  In addition to the mentors, another 600 adult and student volunteers supported these activities by contributing time to present activities and/or providing materials for activities.


The Friend Fitness program is an individualized strength and fitness program for male and female adolescents.  In 2006, 93 teenagers participated in the program, with assistance from 79 adult mentors during twice-weekly sessions.  Students and mentors also participated in activities such as picnics, group workout, and luncheons.  While there was some cost associated with the latter, for the most part, this is program conducted by volunteers at facilities that are provided at no costs.

According to the IRS 900, the Friend Program costs were $234,365. There was not a separate breakout for Friend Fitness.  The Annual Report stated the combination of the two programs cost $263,254. While these costs are close in value, the overriding question is how do two programs staffed by volunteers end up costing a quarter of a million dollars?

Conclusions

 The numbers at TSM don't seem to add up.  Revenues appear to be understated while costs are overstated and the compensation figures are excessive when compared to other charities and foundations. A 2006 study by the Foundation Center revealed that the average compensation costs for a community charity/foundation averaged 12.1%, while the overall compensation costs for TSM were nearly 60%.

It's clear that a comprehensive financial analysis of The Second Mile should be conducted by forensic accountants and auditors to determine where the money was really spent.

Part 3:  Compensation at TSM

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