Financial Calamity at California United Way Stirs Blame and a Bonanza of Gifts

After teetering on the brink of financial collapse, the United Way of Santa Clara, Cal., is on safer ground thanks to a $14-million bailout from some of Silicon Valley’s wealthiest tycoons and foundations.

But the organization’s 18-member board of directors faces blistering criticism for its role in a financial debacle that saw the United Way empty its multimillion-dollar reserve fund, seek an emergency $1-million line of credit, and nearly halt the flow of donations to 100 or so charities as it struggled with a projected $11-million shortfall.

“Shame on them,” said Robert I. Mulford, a former member of the United Way of California board and a long-time volunteer at the United Way of Monterey Peninsula. “That board should have heard air horns and seen red flags and said, ‘Hold it, what in the hell is going on here?’”

While acknowledging some responsibility for the financial collapse, board members defend their performance, saying they were led astray by overly optimistic fund-raising predictions by the organization’s chief executive, Eleanor Jacobs, who was fired last month from her $157,000-a-year post.

“It wasn’t that we were just asleep at the switch,” declared treasurer Roy M. Avondet, the United Way’s former finance-committee chairman. “We were trying to do the best we could.” The board asked “penetrating, difficult questions” of Ms. Jacobs, he said. “The only thing we could possibly be criticized for is perhaps in hindsight not being skeptical enough about some of the answers we got.”

Ms. Jacobs acknowledges one blunder — without seeking board approval, she gave generous severance pay to employees who agreed to leave in a cost-cutting move. But she takes issue with the board’s characterizations of her overall performance.

“There is an attempt to give an impression that I was running a rogue organization with no input from the finance committee and the board, and that is absolutely not true,” she said. “I think I have been made the scapegoat.”

As the finger pointing continues, charities that receive support from the Santa Clara United Way are resting easier thanks to an emergency bailout from some of the region’s wealthiest patrons. As of last week, a newly created “bridge fund” administered by the Community Foundation Silicon Valley had attracted some $13-million. Another $1.1-million was collected by the Peninsula Community Foundation in San Mateo County.

The biggest gift — $5-million — came from Microsoft founder Bill Gates, through his family’s foundation. “It just seemed beyond imagination that the United Way in a place like Santa Clara County could just go by the boards,” said Mr. Gates’ father, Bill Gates, Sr., who runs the foundation.

For the moment, the United Way is being run by its board chairman, Michael E. Fox, Sr. Meanwhile, oversight committees are working to get the United Way back on track. The work includes a financial audit, disbursement of the emergency donations to local charities, and a strategic plan to reshape the organization.

Despite the efforts to revive the Santa Clara United Way, however, serious questions remain as to how it could have fallen so far in the first place. How, critics wonder, could a board made up of seasoned business executives such as Mr. Fox, who owns a beverage distributorship, and Mr. Avondet, a managing partner at the accounting firm of Deloitte & Touche, have missed the signs that a crisis was in the making?

The answer, in Mr. Mulford’s unvarnished view, is that “the board abdicated its responsibility. Eleanor Jacobs did what she was hired to do. Did she make mistakes? Yes. But it was more the board’s responsibility than hers.”

But board members bristle at the sentiments of the critics. “They’re misinformed,” said Mr. Fox. “They don’t have the facts.” Added Mr. Avondet, “People can draw the conclusions they want, but I can tell you that we were acting in good faith.”

Mr. Avondet said the United Way’s “fundamental problem” was that overall fund raising was flat in recent years while, at the same time, more and more donor dollars were being earmarked for specific charitable causes, a trend called “donor designation.”

Thirty-seven per cent of the United Way’s gifts fall into that category, up from 30 per cent five years ago. As the percentage rose, the amount the United Way had available in its general “Community Care” fund for allocation to charities was flat or falling. Yet the United Way did not cut back on the amount of money it was sending to those charities.

While donor designation did not, in itself, cause the financial collapse, “it does tie your hands” to have so many dollars restricted for specific uses when money for general allocations is tight, said Dennis Wootten, the United Way’s chief financial officer.

Donor designation also has played a role in financial woes at the United Way of San Diego County, where 60 per cent of gifts are earmarked for special uses. The San Diego United Way has struggled with shortfalls off and on for a decade and in the past has dealt with them by using reserves, said Gary Lynn, director of finance. But reserves are gone, and the United Way this year has a shortfall of $305,000, mainly because it overestimated projected revenue and underestimated donor-designated gifts, Mr. Lynn said.

The United Way has been taking steps to avoid future shortfalls by modifying its allocation methods. Meanwhile, no charities will be hurt this year because the deficit is being subsidized with a bank loan that the United Way plans to repay through a special fund-raising campaign, Mr. Lynn said.

In Santa Clara County, donor designation conspired with other woes to push the United Way to the brink. Mr. Avondet said that Ms. Jacobs persuaded the board that fund raising was healthy and that big gifts — including $3-million in oral pledges — would be rolling in. That turned out not to be exactly true, he said.

“If Eleanor would have ever said to us, ‘You know, I’m worried. We’ve been working at raising money from big donors for over a year and we haven’t gotten a nickel yet,’ then I think we would have responded,” Mr. Avondet said. “But every time we poked or pushed — ‘Are things really as good as you’re telling us they are?’ — the answer was not only that, but that they’re even better.”

Mr. Fox, the board chairman, said it would have been “insensitive” to the potential contributors to press Ms. Jacobs to identify the names of her prospects and explain in detail the status of her fund-raising requests.

A measure of the United Way’s financial collapse was the depletion of its reserve fund of cash and investments. In 1994 the fund stood at more than $12.6-million, a sum that some board members believed was too high. They wanted the money to be used for current charitable needs.

But the reserves kept shrinking, and by last October they were gone, Mr. Wootten said. That month, the United Way met with charities to tell them so. Even though the United Way drew $600,000 from its $1-million line of credit to pay operating costs and allocations to charities, the sum was not nearly enough to avoid the need for the bailout.

Some observers question why the board didn’t catch the meltdown sooner. Mr. Avondet acknowledged receiving regular financial reports, including ones on the reserve fund that were sent directly to him. But, he said, the reports showed only a snapshot of the reserve at a moment in time, not a picture of developing trends. He said he thought the reserve balances were fluctuating according to changing cash-flow needs during the year.

“To me, trends are something that management should be reporting, and no one ever laid out the trend,” he said.

Ms. Jacobs sees the past few years in a far different light than does the board. It is “a little bit disingenuous” for the board to claim it didn’t know what was happening with the United Way’s finances in light of the fact that it was getting regular financial reports, she said.

With regard to fund rasing, Ms. Jacobs said she had indeed been “aggressively pursuing major gifts of many people of high personal wealth” who had given substantial amounts in the past. “These were no cold-call, pie-in-the-sky efforts,” she said.

While defending her tenure as chief executive, Ms. Jacobs nonetheless admitted erring when she signed off on a $972,000 severance package for employees who agreed to resign in a cost-cutting move. Mr. Wootten said that Ms. Jacobs told neither him nor the board about the package ahead of time.

“In hindsight,” Ms. Jacobs said, “I should have taken that to the board.”

With the United Way trying to dig its way out of precarious financial straits, those close to the troubles already can look back and think about what they might have done differently.

“I learned something,” Mr. Avondet said. “I didn’t think as a treasurer I had to be the auditor.”

Mr. Fox acknowledged responsibility for what happened at the Santa Clara United Way — but only to a point. “My culpability is in the area of trusting, believing, and not doubting anything from any source,” he said. Asked to explain more clearly how he thinks he is responsible, he replied, “I don’t know how.”