California United Way Dismisses CEO Amid Charges of Financial Wrongdoing

Though located in the heart of wealthy Silicon Valley, the United Way of Santa Clara County is on the verge of financial collapse after spending virtually all of its reserve fund and giving more money to charities over the past five years than it had raised.

Government and philanthropic organizations in the Silicon Valley area are rushing to find ways to help local charities avoid a financial meltdown now that the local United Way has announced that it cannot afford to give out any of the $11-million it had promised to give to 104 organizations this year.

Board members of United Way of Santa Clara County, located in San Jose, Cal., have placed the blame largely on the organization’s chief executive officer, Eleanor Jacobs, and they fired her on May 6. They said that Ms. Jacobs gave them misleading information and kept them in the dark about the depth of their organization’s fiscal problems.

“The problem with Eleanor is she was so charismatic she had you believing everything was wonderful and money was coming in the door every five minutes,” said Michael E. Fox, the board chairman. “There was always hope for tomorrow.”

Ms. Jacobs’s dismissal came after she made a last-ditch effort to cut operating costs by offering financial bonuses to employees who agreed to resign. Board leaders said that although Ms. Jacobs had told them about a possible reorganization, she provided no financial details about the size and scope of the offer, which was so generous that nearly half the charity’s 67-member work force took it rather than face possible layoffs later. As a result, the United Way is now obligated to pay more than $900,000 to the employees who took advantage of the buy-out offer.

Dennis Wooten, the Santa Clara United Way’s chief financial officer, said that Ms. Jacobs had offered the employees nearly one month’s pay for every year they had worked, rather than providing them one or two weeks of pay for each year of employment, as is customary at most non-profit organizations.

Ms. Jacobs said in an interview that she kept the board fully apprised of financial and personnel matters, and says she is being blamed unfairly because the organization was already troubled when she arrived four years ago. “I inherited a difficult situation and I feel it has substantially improved during my tenure,” she asserted.

The crisis in Santa Clara County comes at a time when many United Ways felt that they had recovered their credibility — and their ability to raise money — after United Way of America suffered a major management scandal. In 1992, then-president William Aramony was forced to resign after revelations of mismanagement that eventually led to a criminal conviction and jail term.

The United Way of Santa Clara County was one of the organizations that found fund raising difficult after the Aramony episode, despite a booming local economy. In 1995, the board hired Ms. Jacobs, who had a reputation for successfully turning around other non-profit organizations, with the hope that she could recruit some major new donors.

Ms. Jacobs’s efforts to attract big gifts did not materialize as expected, and the financial problems were exacerbated by the board’s decision to give away much of the money in its reserve fund. Officials said they felt that the reserve fund, which totaled $12.6-million in 1994, had too much money at a time when charities needed help with their operations.

Meanwhile, the returns from the United Way’s annual fund-raising campaigns had been generally flat or declining for several years.

The situation came to a head when the board set a budget for allocations to charities based on the estimate of $25-million in campaign revenue provided by Ms. Jacobs. While last year’s campaign only netted $20-million, United Way was continuing to provide the same amount to charities it would have granted them under the $25-million budget plan.

Part of the problem stemmed from the fact that Ms. Jacobs had counted $2.8-million in “verbal pledges” that were otherwise undocumented. Only $160,000 of those pledges ultimately materialized, according to Frederick Ferrer, the board’s vice-chairman. The combination of unpaid pledges, the buy-out, depleted reserves, and lagging fund raising was an equation that eventually resulted in a cash-flow disaster.

Charity leaders in the Santa Clara area were stunned by the news and now face difficult decisions of whether to cut their own programs and lay off staff, or to attempt to find replacement funds elsewhere.

“We’re still in shock,” said Eve Sandoval, executive director of Big Brothers/Big Sisters of Santa Clara County. The charity expected to receive about $100,000 of its $500,000 annual budget from the local United Way. Although she had ambitious plans to double the number of children served by her organization this year, she is now unsure how she will get the money to do so.

The Second Harvest Food Bank of Santa Clara and San Mateo Counties stands to lose about $235,000 in United Way support out of a $6-million operating budget, according to executive director Dave Sandretto.

Local charity leaders say they find it difficult to understand how United Way’s chief executive officer could have made so many serious financial decisions without letting board members know about them.

“It’s a wake-up call for board members, because if they are not getting the financial information that they expect to get, they need to press for it,” said Mr. Sandretto. “The minute they hear of something that is an irregularity, they better start asking questions.”

At the same time, he also wondered how Ms. Jacobs could make major decisions without consulting her own board. “I do not understand how an executive director can put out a severance package without even running it by a board of directors,” he said. “I would never in a million years think of doing it.”

Mr. Sandretto and other recipients of United Way money said they found it ironic that they had been required to meet a strict set of financial-management standards — standards that the local United Way did not appear to be applying to itself.

Nancy Tivol, president of the Association of United Way Agencies, said her organization is standing by United Way’s board. She said she believed that Mr. Fox, the board chairman, was working aggressively to improve oversight of the charity’s finances. She praised his “complete candor” in acknowledging that the board had made mistakes in failing to press for more information, and said she had faith in his ability to rebuild the organization.

Santa Clara County government leaders said last week that they would support a measure to provide $1-million — if the money could be matched 2 to 1 with private funds. And the Community Foundation Silicon Valley simultaneously announced that it is starting a “bridge fund,” raising money from corporations, individuals, and other foundations to help offset the multimillion-dollar United Way shortfall.

Within days, the new fund had already received its first gifts from Silicon Valley companies: a $1-million cash donation from Steve Kirsch, founder of InfoSeek, an Internet search service, and another $1-million from e-Bay, the Internet auction company.

Donations to the bridge fund will not go to United Way, however, officials said. Instead, the money will go directly to the charities that had been counting on United Way aid.

“We do not yet have a clear understanding of the finance or legal issues the United Way may be facing, so donors are understandably reluctant to donate to them,” said Peter Hero, the community foundation’s president.

Mr. Hero said that he, and other potential donors he spoke to last week, see the bridge fund as a short-term solution to help fill immediate needs while the United Way takes the steps needed to bring its budget under control.

“We are not interested in replacing United Way. This is merely to step in, the same as if there were a natural disaster,” he said. “We anticipate over the next year that the United Way board will undertake a far-reaching examination and come up with a United Way that is vigorous and strong. But it needs time to get its own house in order.”

Some local charity leaders predicted that campaign contributions to the Santa Clara County United Way will drop as employees who give through payroll deduction continue to learn about United Way’s fiscal woes. “I think that the campaign will come to a screeching halt,” said Mr. Hero, of the Community Foundation Silicon Valley. “I don’t think people will be rushing to pledge.”

At the Hewlett-Packard Company, which is the United Way of Santa Clara County’s largest corporate donor, 59 per cent of the roughly 20,000 employees who work in the San Francisco Bay Area contribute to United Way. Soon after the financial crisis was revealed, at least a few of those employees demanded that their payroll deductions to United Way of Santa Clara County be stopped, according to Paul Milioto, Hewlett-Packard’s United Way program manager. Hewlett-Packard, said Mr. Milioto, has no plans to curtail its employee-giving campaign, which was due to start in September.

Betty Beene, president of the United Way of America, the umbrella organization that represents some 1,400 local United Ways, said that her organization has taken steps to help the Santa Clara County unit. In addition to offering public-relations advice, she said that United Way of America has offered to place an interim chief executive there and has already sent a senior-level staff member to the unit to help officials manage its operations as the organization tries to resolve the fiscal problems.

Ms. Beene said the revelations in Santa Clara were particularly upsetting because they came just weeks after local United Ways voted to adopt new requirements designed to help boards and staffs do a better job of financial management. Starting in 2001, local United Ways will be required to undergo an evaluation led by the board and chief executive every four years and to report the results to United Way of America.

While severe, the financial crisis at the Santa Clara unit, Ms. Beene said, could have been much worse had Ms. Jacobs stolen money or enriched herself at the charity’s expense, as did Mr. Aramony.

“This is not a case where someone flew first class and took a cruise down the Nile,” Ms. Beene said. “The mistakes here, while tragic, were made out of good intentions. She truly believed in the agencies, but the focus on them served to limit her perspective of the wider financial realities.”