Monday, April 02, 2007

In Which the Years of CHCA Mismanagement Are Explored

The following is the Oversight Committee Report prepared for the Chestnut Hill Community Association. It provides a look at what has transpired with CHCA over the past few years (read this site for a one-year history) Below is the infamous front page of the Local when the president of the CHCA attempted to justify the behavior that caused so much turmoil. The report which follows dispels any claims to legitimacy to which the former regime clings.

Report of the Oversight Committee
Financial and
Administrative Management
Chestnut Hill
Community Association
Chestnut Hill Community fund
2003 – 2006

The Oversight Committee of the Chestnut Hill Community Association has spent the last few months studying and reviewing the operations of the CHCA and the CHCF over the recent past. While this review was taking place major changes in the structure and management of the Fund caused controversy as the Trustees acted aggressively to redirect the effects of the policies over the same period we reviewed. The significant asset erosion was offset by a substantially higher than anticipated market value purchase of one of the Fund’s real estate assets. In essence, years of negligence in management were offset by market appreciation that no one could have predicted when the investment was made. While this transaction masked years of continuing losses and asset dilution, it should not go unreported.

The CHCA management situation took a new direction as a result of the 2006 Board elections. The changes here are ongoing and challenging. Hopefully the public release of the results of our review will aid in keeping those reforms and the return to due diligence a priority for those who have the responsibility of management. With new Trustees in place, and the possibility of simply using Fund assets at will eliminated, the CHCA has had to face some serious belt tightening and reprioritizing. At this moment we still do not know just how serious the financial losses accumulated in fiscal 2005 that ran through 3/31/06 will amount to. What we do know is that $93,000 in new debt, much of it unauthorized, was created in one month of that calendar year, and that payable balances of major proportions were run up and hidden from public view. Independent certified audits of at least the last fiscal year and annual audits going forward should replace the current system of audits only every second year.

The Oversight Committee has made every effort to verify the points it raises from reliable sources and document them accordingly. Exhibits are attached to the report where appropriate. Sources include Board and Executive Committee minutes, newspaper articles, internal CHCA and CHCF records, documents from vendors, state and government agencies, financial statements and tax returns, loan documents and letters and correspondence from entities doing direct business with the Community Association and the Fund. In addition some information from interviews with key individuals are part of this report.

The members of the Oversight Committee were chosen for their diversity and, in most cases, arms length distance from those who made decisions and set policy within the Board, the Association and the Fund during the period reviewed; essentially 2003 through 2005. Those participating members with some background information were:
James H. Foster: Newly elected Board Member at Large (2006)
Mt. Airy resident; no previous CHCA or CHCF association

Ed Feldman: Previous Board Member – resigned before period covered
Chestnut Hill resident; Elected Board Member 2006

Martha Haley: Board Member for 5 months - Budget & Finance Committee
member 8 months – Non Board Member
Chestnut Hill Resident since 1998

Nancy Hutter: Newly elected Board Member at Large
Attorney; Member CHCA for 35 years
Chestnut Hill resident since 2002

Carl Shaifer: No Board Experience
Member Chestnut Hill Rotary Club
Chestnut Hill resident since 1991

Meredith Sonderskov: Born and raised Chestnut Hill – left after college – Returned
1996 – Institutional Member CHCA Board 2006-07
Board President, Senior Center; NIM Board Member

The nearly fifty year old Chestnut Hill Community Association and its affiliated 501c3 Endowment Fund established in 1972 are well structured formalized entities designed to both serve the community and fund activities that provide a quality of life aspect to deserving area charitable institutions.

The approximate 2600 paid membership and community at large depend on the CHCA Board and the Fund Trustees to provide leadership and control over these organizations and the By-Laws and Trust Declaration clearly define the obligations and responsibility demanded of those who hold those elected and appointed offices. There is little ambiguity and significant direction as to procedure in those documents.
Clearly the intent of those who founded these organizations and drafted those documents was to perpetuate open channels for participation and communication for all interested parties, maintain the fiscal stability of the Fund assets and spend its earnings annually in a responsible manner while protecting the principal. Both of these fundamental aspects of sound administrative and fiduciary management have been regularly disregarded in recent years in a manner that reflects negatively on the part of the Officers, Board Members and Trustees alike. Many decisions were clearly inconsistent with sound judgment and in violation of the By-Laws and Declaration documents.

The Oversight Committee has provided recommendations on several occasions since July 2006 regarding the institution of fundamental and routine safeguards that any corporation of its size and level of activity should have followed. Previously cited negligent practices include uncontrolled disbursements, little financial oversight, both internally and from the Board, improperly authorized federal filings, and altered documents to name a few. In addition, fabricated loan documents, improperly maintained financial records that distorted reports, and a reckless pattern of activity regarding borrowing against Fund assets, both with and without Trustee authorization, have been substantiated. Minutes of key Executive Committee and Board Meetings over one specific period of time in 2004 are missing, and what became a regular practice of holding meetings without required notice and agenda publication, permitted a small management team to initiate actions that violated due process and By-Law requirements; often without scrutiny and adequate questioning by the Board.

Furthermore, by maintaining ownership of money-losing assets and borrowing to the maximum against the advice of its own appointed financial advisor, there is evidence that neither the CHCA Board nor CHCF Trustees were concerned about the continuing dilution of Fund value. Trustee meetings and analysis of financial statements of the both the Fund and the Association seem to have been abandoned for much of the period covered and there is little evidence of comprehensive Treasurer reports of the weakening overall financial condition of the two entities during this time. The one Treasurer’s report outlining the deteriorated state of the finances near the end of the period we covered (Nov. 2005) was reported with clarity in the Local, but the scheduled meetings for discussion were not attended by the President or most key officers and executives responsible for major decisions. (See Exhibit A)

Memories of some recent and current Board members, as well as newspaper reports in the Local and Board minutes in hand, indicate a growing concern for the practices outlined above from a vocal minority who objected to abbreviated discussions of financial matters, By-Law violations, and the modification of those By-Laws under what were characterized as illegal tactics. The same regular voting majority kept those objections and concerns from having any effect.

Changes in the By-Laws resulted in control by a small group over the editorial independence of the Editor of the Local. There were clear attempts to keep specific reports from publication and increased efforts to interfere in the functions of the Association’s most public asset. A crises erupted when multiple key employees of the Local resigned in opposition to these actions, leaving the Local adrift and pushed further from an objective forum. This situation wasn’t stabilized until a new Administration took office.

Financial irregularities at the CHCA continued undetected until the newly elected Board was installed in June of 2006. Contracts for non-essential outside services were authorized by non-officers, erroneous grant documents were created and further borrowings against Fund assets took place without Trustee knowledge. Fiscal 2005 (Ending 3/31/2006) took an already money-losing CHCA and Fund further into deficit spending in an amount yet to be fully determined, but initial unaudited reports point to a figure far in excess of the losses of the two previous years.

The Association that was handed over to the new Board was awash in debt and in precarious financial condition; much of it hidden by incomplete internal financial records. Faced with the almost immediate resignation of the three key employees who had the most knowledge of ongoing policies and kept the financial records, continuity of the day-to-day operation was jeopardized. Almost immediately a seriously delinquent and unledgered printer’s bill threatened to shut down the Local. Built up balances in other accounts and other unledgered debt manifested itself creating a crisis management situation. Turning to the Fund Trustees, after approval from the Board, more funds were secured to the keep the organization afloat. This emergency $31,000 action further diluted the Fund assets already encumbered in the amount of $180,000 by two loans with no planed repayment documented.

Finally, after the Board’s suggestion, the Trustees agreed to sell the money-losing building at 8431 Germantown Avenue. Even as this transaction took place the Trustees misled the Association and the Board and operated on the legal edge of the Declaration of Trust. These Trustees have been replaced.

The Oversight Committee review is concentrated on the fiscal years that ended on March 31, 2004, 2005, 2006 which roughly correspond to calendar years 2003, 2004, and 2005. This is the period where actions by the Board and the Trustees, by omission and commission, created many of the problems the new Board is dealing with. Only by identifying and recognizing mismanagement in the past, can the Association hope to move forward to a fiscally sound productive future. Jointly refocused Trustees and Board Members are essential to the future of the CHCA and the Fund.

Attached is specific information to support the Committee’s conclusions. Additional detail will be available upon request.

While there were many aspects of this organization for the Oversight Committee to study, the limitations on time, and the importance of presenting some conclusive findings to the Board and community required us to focus on those areas where we could quickly access documented information and records. It has long been acknowledged that following the money is the quickest reflection on the success or failure of any organization and that is one area we did pursue.

We reviewed the financial statements and internal reports; we also relied on the memory of individuals who served in a fiduciary capacity for both the Fund and the CHCA where possible. Unfortunately there have been complications in the preparation of the 3/31/06 audited year-end statement for the Association and the Local which are consolidated for reporting purposes. Delay in authorizing this work by the previous administration was complicated when the new administration was not aware that an engagement letter was not sent in early April 2006. Our accountant who had regularly performed these audits for years never called it to our attention. Delays on the part of the new administration after this discovery did not help matters. Very recently the Oversight Committee discovered that significant essential postings to the ledgers of the CHCA and Local were not done as far back as September 2005, and possibly earlier. The net effect of this condition is that even the bleak financial perspective outlined in the scheduled Treasurer’s Report of November 2005 may have been understated. (Seven B&F Committee members, also members of the Executive Committee, and the President did not attend that meeting, see Exhibit A) We have concluded that any accountant’s report based on 3/31/06 figures currently in the ledger has to be assumed inaccurate. A full verification review going back through most of 2006 should precede anything that the accountant or CHCA Treasurer is asked to sign. It has been almost three years (3/31/04) since we have seen audited figures.

What we have learned from internal records, bank reports, and verbal and written contact with those having fiduciary responsibility paints a bleak picture of reckless financial management, careless oversight from the Board and Trustees, and manipulation of records.

As structured, the Community Fund’s Trustees were to oversee the assets and make investments that would maintain principal with the earnings able to be distributed to support the CHCA in its administrative and fund raising activities. In addition, the CHCA is engaged in annual fund raising and annual distributions. The Local, a separate corporation, is an independent business entity that generally earned modest profits on its nearly $1,000,000 revenue in recent years.

It is well-known that the CHCA does not earn its own keep and for years the profits of the Local were often transferred to the CHCA in a line item on the financial statements that were then consolidated for reporting purposes. That process seems to have ended in 2003 and identifying true earnings from the Local and losses at the CHCA becomes more difficult. Each year since 2003, the assets of the Fund have been diluted by borrowings against those assets that were then lent directly to the CHCA to subsidize disbursements in excess of fund raising and general losses in administration beginning with a $70,000 draw down against the securities held in the Merrill Lynch account in late 2002. Although the Merrill Lynch account was an earning asset for the Fund, the line of credit was established to allow for short term borrowings with a set interest rate tied to the market. Repayment was anticipated to be arranged in advance and of short duration. This is according to the account manager who also served as an advisor to the Trustees, Mark Nottingham. Further dilution of the Merrill Lynch account takes place in 2003 and early 2005 when the maximum amount drawn under regulations reaches $130,000 with interest by then over 9%. No repayment program was documented or agreed upon, although one was suggested in writing by Chestnut Hill Community President Maxine Dornemann in March of 2005.

In documents submitted to the Oversight Committee, Mr. Nottingham had gone on record with the Trustees, President and Executive Committee Members regarding the dilution of assets through borrowing without programmed repayment on two occasions in February 2004 and March 2005. According to his submitted information not one member responded to his documented objections other than a verbal admonition from Trustee Butler advising him he was too much of a “naysayer” and he should “go along with their vision” if he wanted to stay involved as a financial advisor. (See Exhibits B, C and D)

CHCA President Dornemann requested another $50,000 draw down against the Merrill Lynch account in March 2005, but was told that the allowable ceiling would be reached at $43,000. This amount was quickly borrowed. On March 23, minutes from that Board Meeting indicate the Board approved a $50,000 loan to be used to pay shortfalls in fund raising. This loan was to be used to quickly repay the Merrill Lynch drawdown of $43,000 taken on 3/21/05 purportedly to accomplish that purpose. Although the loan was granted, the payback never occurred. (See Exhibit E)

In one of the most interesting events reviewed, Maxine Dornemann appears on a loan document from Earthstar Bank in Northeast Philadelphia as the sole signatory on a $50,350 loan dated 4/25/05 as the “President of the Chestnut Hill Community Fund,” (italics supplied) a non-existent office. The security for that loan was the Fund-owned property at 8431 Germantown Avenue, a building that the same Earthstar Bank held a first mortgage on since 12/05/02. While it might be assumed that the signature and title was a typographical error, it is clear from the earlier document that the bank knew full well that the president of the Trustees of the Chestnut Hill Community Fund was required to authorize borrowing against that real estate asset. (See Exhibits F and G)

When contacted, the Senior Lending Officer at Earthstar Bank could not explain why the documents were drawn up differently and admitted that the Bank actually had a copy of the 1972 Declaration of Trust in the file and through that knew the requirements. He further explained that the same lending officer who authorized the 2002 loan, made the 2005 loan as well. He indicated he would inquire with that officer how this could have happened and get back to us. When called four days later, the officer that authorized those loans was no longer employed by the bank. (See Exhibit H)

At a meeting with former Chairman of the Trustees, Thomas Butler and the Chairman of the Oversight Committee was held in mid December 2006. The purpose was to clarify when the Trustees met and how they operated. At that meeting we learned that he had no knowledge of the loan generated at Earthstar bank, despite a Fund asset being used as security for a CHCA loan. We were further informed that some draw downs on the Merrill Lynch borrowing account were done without his knowledge. When asked about meetings of the Trustees and review of the Fund and CHCA financial statements, he said he could not remember when they last met, and that his requests for financial statements through former Bookkeeper Kari Gazarian and President Maxine Dornemann on many occasions were met with no response. After a protracted 3 hour interview Chairman Butler was asked if he would respond in writing to several questions from the Oversight Committee. He acknowledged he would and reaffirmed that statement in open forum at a Special Board meeting in January 2006. As of this date (March 22, 2007) the Committee has not received a reply despite a second request by certified mail. (See Exhibit I)

A similar meeting with Mark Nottingham to gain fuller understanding of his role as account manager for Merrill Lynch and Advisor to the Trustees for a period of time was more enlightening. Mr. Nottingham provided verbal information and he provided the Committee with a written narrative of his experience, earning statements of the Account, Loan Documents and his written communication with the Board regarding the debt and internal policies within the Association and the Fund. (See Exhibit G)
The bottom line is that during the approximate three year period reviewed, the losses generated within the organization created new debt in the amount of $180,000. $93,000 of it borrowed in one 30-day period; all of it using Fund assets as collateral. The Earthstar loan of $50,000, with clearly unexplained and inconsistent documentation, and supported by Chairman Butler’s perspective, seems to have been intended to escape Trustee approval. However, the Trustees also apparently approved regular borrowings against the Merrill Lynch securities, and allowed the money-losing building at 8431 to continue as a Fund asset with its annual losses wiping out any earnings on the securities. In addition, there was the mounting interest cost on the two mortgages and the $130,000 line of credit. How the Trustees could not have known that 8431 was a constant money-loser is beyond comprehension. Clearly due diligence was lacking.

But it does not end there. We do know that members of the Association, some on the Board, were aware of the continued vacancies at 8431, the losses it was generating, and the greatly expanded borrowing while the very same Board committed to non-essential services and during the same period actually seriously debated buying another building (Hiram Lodge). The downward spiral of both the Fund and the CHCA financially was not lost on some who tried desperately to follow and challenge the activities of the voting majority. The final and major failure here is with the Board itself, which some rightly characterize as the ultimate Oversight Committee.

In conclusion, it was the failure of the Board itself to analyze the financial statements and heed warning signs by the few voices on the Budget and Finance Committee and Board who raised concerns. The failure to curtail borrowing and spending for contributions it could not fund, the failure to limit expenditures on needless programs and new hires, failure to stop the bleeding of a money-losing real estate adventure, failure to stop the dilution of the Fund assets even when the Trustees failed to do so. The ultimate responsibility lies with those who hold Board membership. In recent years this Board failed to adequately exercise its fiduciary responsibility and oversee the Association entrusted to it.

To see exhibits referred to in this report, visit the Local website at Chestnut Hill Local.


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