Social Enterprise, Job Creation and Community Development

When I signed on to this task with the State of Tennessee, I committed to develop jobs through earned income strategies and practices. I was not asked to, nor did I commit to, limit this economic development effort to those models associated solely with the not for profit world. Throughout the last eighteen years of community economic development, and as a direct result of refining and growing a social purpose strategy that allowed ARC-D to meet the requirements imposed by participation in three federal system change projects, I created, in addition to the not for profit Advocacy and Resources Corporation, a number of additional social purpose businesses.

A social purpose business is a “discrete division, subsidiary or related corporation of a nonprofit or a for-profit company that deliberately pursues financial and social returns within a specific industry segment in the commercial marketplace.”[1] These not for profit and for profit entities that reflected (1) the need to leverage resources to support the development of community services, employment training and/or housing, (2) support to the needs of the not for profit agency and its’ customers and (3) filled a vacuum created by the lack of vendors available to close the supply chain gaps necessary to support the new procurement practices environment that emerged with the ‘reinvention of government.’ These vendors were planned for under Tennessee’s corporation rules,[2] incorporated within the necessary legal and auditing environment, and reflected the agency strategy for insuring that the very best cost structure would be passed on to the government in accordance with constraints imposed by Federal Acquisition Rules (FAR Part 48).[3]

These entities were disclosed, audited, and banked by the same lenders that banked the not for profit organization, with full disclosure and electronic visibility of financial transactions between the entities in place between the companies at the lender level. They included three not for profit and four for profit taxable entities, all designed to serve specific purposes to further the social enterprise community development mission while keeping subcontracting dollars flowing into our local vendor community without compromising the ARC’s not for profit status. The related (shared board members with ARC) business entities were:

• Development Opportunities Inc. (DOI), a not for profit land bank formed for developing housing for persons with disabilities;
• Falling Water Construction (FWC), a not for profit trades training program designed to build the houses and maintain agency facilities;
• Homeowner Dream Management (HDM), a consumer homeownership training program;
• Tennessee Analytical Services (TAS), a taxable for profit laboratory owned by the agency’s Board of Directors.

The for profit, controlled group business entities were:

• TCOMUS, a taxable for profit entity set up as a woman-owned microenterprise for the purpose of supported the esoteric requirements of the US Navy and DoD beyond the set-aside purpose of ARC’s set-aside contracts;
• Lewis-Durm Logistics (LDL), a taxable for profit small business which provided trucking and bulk oil supports when the available vendors to the vegoil program were unable to fulfill requirements;
• Fruition Foods, a taxable for profit research entity designed to engineer commercial frozen products for eventual commercial sale or set-aside; and
• McRae Durm Properties, the partner ownership of a hubzone-located building (formerly owned by IWC) procured and improved for the unitized group rations program (UGR-A), which was commercially awarded and slated for a future JWOD set-aside.
  

Each of these entities properly reflected the IRS requirements for separating the distinct missions, accounting for revenue generated by the activity, and instituted the construction of a ‘firewall’ between the organizations for the payment of taxes on unrelated business income (UBIT),[4] and hiring of nondisabled personnel, while closing the vendor gaps in support of the agency contracts and while offering services to others. Between them, they employed forty five low-income persons whose socioeconomic status did not qualify for employment through ARC.

The IRS audited the for profit entities not owned by ARC in 2005[5] and assisted by a contracted certified public accounting firm, determined that these entities should be handled as a ‘controlled group’ with unrelated business income taxes and outstanding equipment notes paid down, taxed and passed through the tax returns of the owner operators as ‘management fees.’[6] Wages and salaries did not accrue to the registered agent of record, ARC board members, or the registered owners of these entities. In keeping with the model adopted, profitability was retained and reinvested within the social purpose businesses, and supervision was provided by a General Manager.[7]

ARC did not contribute funds to the for profit entities of TCOMUS, LDL, Fruition Foods, or McRae-Durm Property, nor did these entities enjoy less than fair market benefit from their relationship as a supporting vendor to ARC. These facts are a matter of public record and were absolutely handled in accordance with IRS Publication 598-Unrelated Business Income[8] and OMB Circular A-122 – Costing and pricing rules for not for profit organizations[9] and A-133 –Audit rules for not for profit organizations.[10] Over the years of their operations, transactions between these entities and ARC were carefully scrutinized, audited, and disclosed in the agency’s books and minutes and annual financial report. In the aftermath of ARC’s bankruptcy filing, all of these entities were closed and employees released.

Reinvesting its’ earned income, or net return, ARC contributed startup capital to the not for profit entities Development Opportunities Inc, Homeowner Dream Management, Falling Water Construction, and the board owned for profit Tennessee Analytical Services (TAS) as part of a comprehensive agency community development plan. Five banks and nearly forty persons drawn from the community participated in the design of these entities over a multi-year period. Each had separate boards, structures, bylaws, and missions, including land-banking, homeowner counseling, construction trades training and analytical services. At the time of this writing, all of these entities have been terminated, employees and programs terminated, their assets reabsorbed into the bankruptcy estate of ARC, and for the most part, sold at pennies on the dollar. [1]

[1] The Trustee occupied the leased building on Whitney and Willow for nine months post petition, and despite pleas to assume responsibility for maintenance during the period of occupation, failed to allow routine maintenance of the freezer equipment. This led to the spoilage and wasting of nearly $500,000 worth of edible foodstuff under the care and custody of the Trustee, and led to the unnecessary damage of compressors and fixtures. When the building was finally abandoned by the Trustee in February 2008, eighteen dumpster loads of spoiled food and garbage were removed from the property occupied by the Trustee; the widespread and completely unnecessary damage to the building fixtures and equipment were documented by photos and inspection by insurance adjusters.

The Oregonian Newspapers "Investigate" JWOD

In 2004, writers for Newhouse News Group publishing through the Oregonian Newspapers, conducted a review of the JWOD/AbilityOne program after allegations arose in the State of Oregon regarding unfair competition practices between the small business community and the state set-aside program. Their reports led the writers, Les Zaitz, Brian Denson and Jeff Kosseff, to an examination of the federal program’s employment practices, the definitions of severe disability that qualified participants, and eventually, compensation strategies in the JWOD program.

Subsequent reports[1] focused on the executive compensation packages of the top 20 producers under the program utilizing the gross numbers reported on annual not for profit IRS Form 990 filings submitted for the year 2004. For the fiscal year in question, the Advocacy and Resources Corporation was number six in on this list of producing agencies due to increases in partnering programs with the Department of Agriculture. Wi thout the benefit of significant analysis or elaboration, Denson and Kosseff’s reports intimated that the growth in wages during the years 2004 and 2005 of grouped executives at the helms of the organizations under scrutiny was related to opportunistic practices’ amounting to private inurement or ‘self-dealing’[2] and that the nationwide executive group as a whole, was engaged in practices designed to benefit themselves at the expense of both the government and the severely disabled employees served by the JWOD program.

Their body of work cited the disparity between wages paid to persons with very severe disabilities compensated under the Fair Labor Standards Act (FLSA) [3] for ‘Sub minimum Wage’ and hourly wage to wage packages paid to executives, without acknowledging the very different job skills, responsibilities, capabilities and education required or the market conditions under which services and products were contracted for in the JWOD environment. Their ‘analysis’ and exploration of the issues failed to acknowledge the complexity of the organizations, the essential management skills required, or the wide variation in contractor requirements and business models. They also failed to acknowledge the difference in regulatory requirements in reporting ‘not for profit’ wages and benefits as opposed to ‘for profit’ compensation, imposed by the Internal Revenue Service through the use of Generally Accepted Accounting Practices (GAAP).[4]

The circulation of this series of articles raised questions which resulted in increased discourse across the country that helped to clarify that a wide range of compensation practices in the program appropriately existed which were dependant on geographic region, agency size, contract management requirements and populations served, and overall, reflected a complex variety of agency financial strategies and resources. The increase in scrutiny also exposed conditions that, in at least one case, agency management may have financially benefited by their relationship to a not for profit that was being operated without regard to compliance with the direct labor record keeping requirements for participation in the JWOD program. Subsequent investigations of the agency in question yielded information that oversight by the JWOD program had been lax and that violations of direct labor regulatory record keeping requirements had been repeatedly unenforced.

Based on this example, ‘the JWOD baby got thrown out with the bathwater’ and every agency’s collective leadership on this list of twenty found themselves forced to examine and defend agency practices to their various constituencies, whether warranted or not. By implication and through media reports, these allegations in all of their reprinted and variously edited forms, filtered into the community in which ARC operated and ultimately, into ARC’s government contract environment.

[1] Denson, B., Kosseff, J. CEOs benefit as charities boom. The Oregonian Online, Tuesday October 18, 2005.
[2] “Self-Dealing” is defined by the Internal Revenue Services in document no. 200813043, issued 3/28/2008.
[3] United States Department of Labor, Fact Sheet 39 – Fair Labor Standards Act (FLSA) – Sec 14(c) Subminimum Wage Compensation of Disabled Workers.
[4] The standard framework for accounting principles generally referred to as ‘Generally Accepted Accounting Principles (GAAP)’ and found at this url: www.fasab.gov/accepted

History and Background of the Social Enterprise

Conceived at the request of the State of Tennessee and born on a kitchen table in 1986, the Advocacy and Resources Corp (d.b.a. ARC-Diversified, or ARC-D) was established for the purpose of utilizing “social enterprise, and earned income practices”[1] to establish an employment and community services system for persons with severe disabilities who reside in the rural Upper Cumberland region of Tennessee. A “social enterprise,” sometimes referred to as operating in the ‘third’ or ‘fourth sectors’[2] of the economy, is defined as ‘an organization or venture that advances its social mission through entrepreneurial, earned income strategies. Payments to the organization are earned and received in direct exchange for a product, service or privilege. Earned income for a nonprofit includes such elements as tuition and fees for service, commercial products or services, government contracts, consulting fees, membership dues (when dues purchase tangible benefits), sale of intellectual property, agreement to use the nonprofit’s identity, property rentals, etc. Earned income does not include such sources as corporate, foundation or government grants or subsidies, contributions from individuals, or in-kind donation of products or services. The intention of this strategy is defined as the extent to which a nonprofit is able to pursue its mission indefinitely through the use of earned income as a method for achieving financial self-sufficiency without relying in whole or in part on charitable contributions or public sector subsidies.’[3] This approach allows organizations much more flexibility in meeting the needs of communities without the constraints imposed by public funders for limiting their services by scope, time, or to specific populations.

Charged by it’s initial grant funding from the State of Tennessee in 1986 to become a financially self-sustaining engine for employment and service system creation in accordance with the definition and practice of social enterprise, the organization affiliated with the Javitts Wagner O’Day (JWOD) (now known as "AbilityOne"[4] program in 1992 after identifying nearly 1500 persons with severe disabilities who lived in the fourteen counties of the Upper Cumberland needing rehabilitation supports provided through a competitive employment model. This piece of legislation, originating in 1938 and periodically revised and amended through the years, was designed to ensure that Americans with severe disabilities who receive rehabilitation services through 501c3 tax exempt providers have the opportunity to participate in federal contract opportunities through the procurement and production of goods and services as part of their employment rehabilitation plan.

Operational oversight of the program is maintained by the Committee for Purchase from Persons who are Blind or Severely Handicapped (the Committee) and two central not for profit organizations, Nish[5] and National Industries for the Blind (NIB).[6] Participating not for profits must maintain strict requirements imposed by the federal government in order to participate, including reserving seventy five percent (75%) of direct labor hours for persons with severe disabilities who qualify for employment and training, maintaining records which prove participant eligibility, and providing evidence that the contract clauses to which federal contracts are subject, are duly implemented . ARC-D was the first affiliate to produce and manufacture government unique food products under the program, growing its set-aside contracts in a light industrial setting in support of both the Department of Defense subsistence feeding programs[7] and the United States Department of Agriculture, Farm Service Agency.[8]

Continuing its’ strategy of earned income through the business practice of social enterprise, ARC-D was a named partner in three government reinvention and modernization programs from 1992 through 2006 including (1) Prime Vendor, (2) the Unitized Group Rations (UGR-A) and (3) the USDA’s reinvention of inspection systems and conversion to Total Quality Systems Audit, modeled after international standards of quality. As a result, and primarily because of the organization’s commitment to and adoption of proactive business practices, quality production and customer service, the revenue basis grew over a seventeen year (17) period to an estimated $68,000,000 in annual revenues and ARC-D gained the technical capacity to produce a number of packaged government unique variants. The employee basis grew from three employees to two hundred fifty (250), and the entity grew from a simple manufacturer to a complex organization generating nearly three million dollars in earned income annually to support the creation of community programs designed to ensure the independence of persons with severe disabilities throughout the rural upper Cumberland region. These programs, funded entirely by net return generated by ARC’s manufacturing contracts, included case management, emergency housing, youth mentoring, drug court support, and an innovative representative payee program supporting approximately 1,800 unserved persons with severe disabilities annually. ARC was not a fundraising charitable organization, did not give away funds to individuals and was not registered with the State of Tennessee as such.

[1] For a complete description of ‘social enterprise’ visit www.sealliance.org
[2] Social purpose mission driven businesses using for profit or not for profit strategies to accomplish objectives.
[3] www.se-alliance.org
[4] For a complete description of the JWOD program, now referred to as “AbilityOne”, visit www.abilityone.gov
[5] For a complete description of the central not for profit known as “Nish” visit www.nish.org
[6] For a complete description of the central not for profit known as “National Industries for the Blind” visit www.nib.org
[7] For a complete description of DoD feeding programs visit www.dscp.dla.mil/subsistence
[8] For a complete description of FSA procurement programs visit www.fsa.usda.gov

About this Blog

Since June of 2006, this private citizen has remained silent on the issue of the Advocacy and Resources Corporation bankruptcy and the subsequent actions of Michael Collins, Trustee. Throughout this period, Cookeville's local newspaper, the Herald Citizen, filed numerous reports as to the events leading to the bankruptcy filing, the status of the organization, its’ reorganization, and the intentions of its’ ‘investor/rescuer’ group, leading the community to speculate as to whether the likelihood exists that the intervention currently underway will be successful and wondering about the causes.

For the record, the not for profit rehabilitation company that I and my coworkers built with love and care over the years became embroiled in the political agenda of Bush appointed politicos who were more concerned about the preservation of their government to business relationships than with the government regulatory processes they were charged to safeguard. After the hurricanes of 2004 and 2005, the organization became the victim of a price dispute over the adjustment of its' federal contract price schedules. Massive interference by key officials along with disregard of procedural and regulatory requirements led the organization into a position of financial distress during a contract negotiation period that lasted months longer than it should have by regulation. In the spring of 2006, our bank, Amsouth prepared to merge with Regions Bank Corporation. The organization, like many others of a significant size and complexity, was placed on the 'outpile.'

Over the months, I have watched the facts of this case become submerged, subordinated to salacious charges lodged as a matter of course by the parties to the bankruptcy proceedings and officers of the court. Interestingly, the handling of these matters have addressed everything except the facts. Under the 'color and protection of bankruptcy law,' officers of the court have made claims that the the inside directors:
· caused corporate opportunities which belonged to ARC to be usurped
· “cooked the books” to manipulate increases in wages
· breached their fiduciary responsibility to govern the business activities of the not for profit organization
· created outside business interests to personally benefit from the activities of the not for profit agency they governed
· shifted revenue to outside business interests when they understood that the financial position of the agency was “headed for the tank.”

These claims, while certainly spectacular, and designed to provoke an extremely emotional response in support of the current operating group’s activities (while creating a ‘smokescreen’ for their outrageous conduct), are not supported by fact or records. Further, regulatory imperatives provide clear guidance and support for the decisions made by agency leadership in a rapidly changing and challenging business environment over the nineteen year period that leadership was at the helm. These requirements have also been conveniently omitted from the overall conversation by the litigants.

As a result of these allegations, omissions and deletions of record and fact, expectations have been raised about the intentions of the parties to the current reorganization effort, great harm has been done to the organization’s ability to financially recover, creditors and vendors who have supported the organization have been harmed, the resources of a remarkable community mental health program have been raided, and the reputations of a skilled management group have been purposefully and needlessly libeled.

While it may be perceived by some as “just business,” it should be noted that, bent on removing the influence of the former management team of fifteen persons, the current operators and legal counsel have impaired the very assets and recovery of corporate knowledge necessary to restore the ailing organization to its’ previous health as a community mental health services provider with important customer and system relationships.

This blog is designed to reinsert the regulatory, decision-making environment back into the discussion and details the facts of these matters. This blog also contains key court filings and submissions which the court refused to consider or allow but which are central to construction of a factual record. Within each posting you will find a summary of events, a glossary of terms, and links to key regulatory references and links.

Breaking the Silence

For months, this private citizen has remained silent on the issue of the Advocacy & Resources Corporation bankruptcy[1] and the subsequent lawsuit filed by Michael Collins, Trustee. During this period, the Herald Citizen Newspaper in Cookeville, Tennessee has filed numerous reports as to the status of the organization, its’ reorganization, the intentions of its’ ‘investor/rescuer’ group, leading the community to speculate as to whether the likelihood exists that the intervention currently underway will be successful and wondering about the causes.


Over the months, I have watched the facts of this case become submerged and subordinated to salacious charges lodged as a matter of course by the parties to the bankruptcy proceedings. Interestingly, these allegations have addressed everything except the facts of these matters. Claims have been made that the inside directors:
· caused corporate opportunities which belonged to ARC to be usurped
· “cooked the books” to manipulate increases in wages
· breached their fiduciary responsibility to govern the business activities of the not for profit organization
· created outside business interests to personally benefit from the activities of the not for profit agency they governed
· shifted revenue to outside business interests when they understood that the financial position of the agency was “headed for the tank”


While certainly spectacular and designed to provoke an extremely emotional response from the community in support of the current operating group’s effort while creating a ‘smokescreen’ for their activities, the records of the organizations in question do not support these allegations when considered in entirety. Further, regulatory imperatives provide clear guidance and support for the decisions made by agency leadership in a rapidly changing and challenging business environment over the nineteen year period that leadership was at the helm. Their requirements have also been conveniently omitted from the overall conversation by the litigants. As a result of these allegations, omissions and deletions of record and fact, expectations have been raised about the intentions of the parties to the current reorganization effort, great harm has been done to the organization’s ability to financially recover, the resources of a remarkable community mental health program have been raided, and the reputations of a skilled management group have been purposefully and needlessly libeled. While it may be perceived by some as “just business,” it should be noted that, bent on removing the influence of the former management team of fifteen persons, the current operators and legal counsel have impaired the very assets and recovery of corporate knowledge necessary to restore the ailing organization to its’ previous health as a community mental health services provider with important customer and system relationships. The following reinserts the regulatory, decision-making environment back into the discussion and details the facts of these matters. Within each topic you will find a summary of events, a glossary of terms, and links to key regulatory references and key
[1] Advocacy & Resources Corporation, Debtor Case N0. 206-03067, United States Bankruptcy Court, Middle District of Tennessee, Cookeville Division. Chapter 11, Judge Lundin Presiding.