The Nebraska Attorney General’s Office, empowered under law to protect the financial assets of Nebraska charities and ensure those dollars are used for public good, has launched a review of the operations of Goodwill Omaha.
Officials declined to detail what specific issues are under examination, though one likely concern is whether Goodwill’s high levels of executive compensation represented an unlawful misuse of charitable dollars.
“We are currently reviewing the matter,” said Assistant Attorney General Abigail Stempson, chief of the public protection bureau and consumer protection division under Attorney General Doug Peterson. “The attorney general is here to protect charitable assets. (This office) has the ability to protect charitable assets if it feels there may be issues.”
Goodwill officials confirmed the inquiry and indicated that they are cooperating with the attorney general’s subpoenas seeking information.
“Goodwill has been notified of a civil inquiry from the State Attorney General’s Office, which regulates Nebraska nonprofit corporations,” said Pauli Bishop, the Goodwill chief financial officer who is serving as its interim CEO. “We are currently working on a response to their inquiries.”
A recent investigation by The World-Herald spotlighted the corporate-style pay package of former Goodwill CEO Frank McGree and the unusually large number of other executives and managers at the nonprofit who were paid $100,000 or more. Goodwill spent so much on executive pay and other administrative costs that scant dollars from its signature thrift stores were left to support the community jobs programs that are central to the charity’s mission.
State law does not provide any specific compensation limits for charities. However, their officers and boards have a fiduciary obligation under law to ensure nonprofit assets are being spent on charitable causes. In addition, state law bars charities from “distributing” their income to their directors or officers in the form of excessive pay.
The big end-of-year incentive bonuses Goodwill Omaha awarded to McGree and other top executives in recent years could come under particular scrutiny.
The attorney general’s powers include the ability to subpoena a charity for information, bring civil action in court against a charity and its leaders, and to seek return of any money that may have been unlawfully paid out.
Based on what’s known about Goodwill’s operations and the attorney general’s authority, the state also could probe possible conflicts of interest involving Goodwill board members and officers, and possible violations of laws dealing with deceptive trade practices.
In addition to recovering assets, the attorney general has the authority to ask a court to remove officers or directors or to completely dissolve a charity.
While dissolution would seem unlikely in the case of Goodwill Omaha, the attorney general’s involvement at a minimum would provide some legal scrutiny and oversight as the charity implements the reforms its leaders have pledged in the wake of The World-Herald investigation.
In spite of Goodwill’s slogan that shopping at or donating to its thrift stores helps the disabled and others with barriers to employment, The World-Herald found that at the charity’s Omaha affiliate, such efforts have contributed more to lofty executive salaries.
McGree received a pay package exceeding $400,000 annually — more than double the average for CEOs at other large Omaha social service nonprofits. A $519,000 payment in 2014 — part of a retirement and retention package signed 20 years earlier — brought his compensation that year close to $1 million.
Fourteen executives and managers at Goodwill Omaha last year were paid $100,000 or more, including McGree’s daughter. None of the nation’s 78 largest Goodwill affiliates could match Goodwill Omaha, for its size, in the number of executives paid six-figure salaries, the newspaper found.
The World-Herald also revealed that out of about $4 million in profits generated by Goodwill’s thrift stores last year, no more than $557,000 found its way into its job programs. Most thrift profits were essentially gobbled up by the agency’s $4 million in overhead expenses, including executive pay.
More than a dozen employees told the paper that Goodwill’s mission in recent years had taken a back seat to executive pay. Job trainers who worked with disabled students became frustrated by the charity’s reluctance to hire graduates to work in the profit-driven thrift stores.
McGree stepped down within days of the initial series, published in late October, and two other high-paid executives have since departed. The charity’s board and Bishop, the interim CEO, have pledged a top-to-bottom evaluation of Goodwill’s pay structure, a third-party assessment of its operations and an ethics review by another outside organization.
Like attorneys general across the states, the Nebraska attorney general has both common law and statutory authority to protect charitable assets. Basic to that power is ensuring that charities are not violating the “nondistribution constraint” — the legal principle that prohibits a nonprofit from disbursing its net earnings among the individuals who oversee the organization.
The Nebraska Supreme Court has ruled the nondistribution constraint is essentially what sets a nonprofit apart from a for-profit corporation. In return for tax-exempt status, nonprofits are required to devote their net earnings to the services the organization was set up to provide.
The attorney general encourages citizens who believe charitable assets are being misused, or whistleblowers who have information about violations by a charity, to file a report with its division that oversees nonprofits. The attorney general has an online complaint form on its consumer protection website, protectthegoodlife.nebraska.gov.
“When citizens have concerns about assets of charitable entities, we encourage them to come to our website,” Stempson said. “That’s how we often get information.”
While Stempson would not detail her office’s look into Goodwill, two recent cases handled by her office illustrate the state’s power to intervene when questions arise about nonprofits.
The Nebraska attorney general joined the attorneys general from the 49 other states and the Federal Trade Commission this year in getting a federal court in Arizona to dissolve two cancer charities accused of bilking donors out of $187 million. The complaint alleged that a small fraction of public donations to the Cancer Fund of America went to services for cancer patients, with most instead paying for additional fundraising operations, high salaries of its leaders and luxury vacations.
As part of the settlement, the charity’s assets were liquidated and its top executive was required to forfeit personal assets, including artwork, a gun collection and a boat.
And in 2014, the Nebraska attorney general intervened in a bankruptcy case involving an Omaha retirement home after a creditor alleged that one of the charity’s officers was diverting funds to family members. That case is pending.
In the case of Goodwill Omaha, the attorney general could look into whether pay and expenses paid to top officers constituted violation of the nondistribution constraint.
State law specifically defines an unlawful distribution as “payment of a dividend or any part of the income or profit of a (nonprofit) corporation to its members, directors or officers.” While Goodwill did not pay members of its volunteer board of directors, several top executives — including CEO McGree and the charity’s executive vice president, chief operating officer, chief financial officer and vice president for federal contracts — in recent years were listed on public disclosure forms as officers of Goodwill.
To determine whether the pay to officers was reasonable, the attorney general would likely look at how the charity complied with IRS regulations requiring executive pay to be based on comparisons with similar entities. Goodwill’s board has defended McGree’s pay as befitting a 30-year leader who significantly grew the charity. The board says it used valid comparisons to set the pay, but has declined to release its pay comparison data to The World-Herald, citing nondisclosure agreements with consultants who provided it.
However, the attorney general’s subpoena authority could force Goodwill to disclose that data. The attorney general has the power to issue subpoenas without going to court when it’s investigating deceptive trade practices or other issues of consumer protection. The attorney general could similarly learn of any severance payments McGree received — another matter the charity has not publicly disclosed.
In a similar case in 2005 the attorney general in Oregon found that CEO pay at Goodwill’s Portland affiliate was not reasonable because it was primarily based on comparisons with much larger for-profit corporations. The charity agreed to slash the CEO’s $831,000 in pay and benefits and to stop making contributions to a big severance package he was to receive when he left the organization.
Goodwill Omaha’s performance bonuses in particular could draw attention.
Goodwill’s public disclosure statements suggest that in the five years from 2011 to 2015 it paid nearly $1.2 million in incentive bonuses to McGree and the four other top officers. McGree alone received $470,000 in such payments — nearly $100,000 a year.
Goodwill officials say payment of performance bonuses was based on achievement of goals in five areas: total enrollment in Goodwill programs, safety, revenue growth, administrative expenses as a percentage of revenue, and operating profit.
An attorney in the Douglas County Assessor’s Office previously questioned whether the payment of bonuses on a basis that included the charity’s profit margin would violate the nondistribution principle. Ron Jensen, an attorney who serves on Goodwill’s board, said in a recent interview he believed that the bonus payments complied with law.
Nebraska law holds that board members can be held personally liable for unlawful distributions but also makes provision for recovery of such funds from those who received the money.
The Cancer Fund of America case involved fundraising misrepresentations made by the charity — another area where Goodwill Omaha could draw state scrutiny.
Though Goodwill runs almost $10 million in jobs programs annually, they are nearly completely funded by grants and contracts with the government and others — not by the thrift stores the charity touts in its ads when it encourages the public to donate goods. A new state law that took effect in July makes it a deceptive trade practice to employ any deception, fraud or misrepresentation to solicit funds or assets for a charitable purpose.
Goodwill board leaders have said they had no knowledge the charity was out of step in the amount of store profits it put into its jobs programs. They said they were unfamiliar with the figures revealed in the World-Herald analysis.
Goodwill also operated a program in which Chinese-made hair rollers were repackaged in bags labeled “Made in America” — a program that it recently discontinued. Nebraska law states it is a deceptive trade practice to misrepresent the geographic origin of a good or service.
The attorney general has the power to seek a court injunction to stop a deceptive trade practice, can accept an assurance from a violator that such a practice will discontinue, and can seek repayment of any money or property acquired by deceptive means.
The World-Herald’s recent reports on business ties between Goodwill, its board and its leaders suggest another area of possible inquiry.
Goodwill Omaha routinely engaged in no-bid contracts with businesses that employ board members, and with smaller companies owned by family members and friends of Goodwill leaders.
Nebraska conflict-of-interest laws allow such dealings as long as several legal steps are followed and if the directors approving the transaction “in good faith reasonably believe that the transaction is fair” to the charity. If the attorney general finds that a transaction was not entered into lawfully, possible remedies include seeking to legally void the deal.
Goodwill officials have said they complied with state laws in awarding the contracts to board members’ companies. They also blame executives no longer with the organization for the smaller no-bid contracts entered into with family members and friends of Goodwill leaders.