Editor’s note: This article is by Rick Jurgens, of the Valley News, in which it was first published May 31, 2015.
[S]pringfield — Health Care and Rehabilitation Services of Southeastern Vermont Inc., a social service agency already under fire after disclosures of a controversial $686,000 payment to a former chief executive, lost $1.8 million operating small group homes in Southern California.
The California losses, incurred during the final three years of Judith Hayward’s 17-year tenure as head of the agency, which ended June 30, inflicted a larger hit on the agency’s balance sheet than the payments to Hayward, but attracted much less, if any, notice outside the agency.
Losses in the distant venture remained hidden in part because of HCRS’ restrictive policy on the release of its audited financial statements. HCRS, unlike other community agencies that provide mental health care and receive funding from the state of Vermont and some local towns, does not make its audited financial statements available to the public. (See related story.)
HCRS files its audited financial statements with the Vermont Department of Mental Health, which made them available for review in response to a request under the state’s public records law by the Valley News.
Those financial statements and board minutes filed with the department describe how HCRS got licensed to operate seven small homes in the Los Angeles area that would care for as many as 22 people with developmental disabilities.
The project was approved by the HCRS board of directors in 2009, according to George Karabakakis, the agency’s current chief executive. “Our previous CEO and the board saw that as an opportunity,” said Karabakakis, who was the agency’s chief operating officer at that time.
Hayward, the former CEO, said she did not wish to comment.
“They needed group homes,” said Bob Margolin, former vice president of the HCRS board. “We had a history of doing that.”
Margolin acknowledged that it was unusual for a Vermont social service agency to be operating “out in California. We all had that thought on the board.”
But Allen Dougherty, former president of the board, said that the agency had received notice that spending reductions in Vermont would put a squeeze on HCRS’ revenues. “We looked into California and it looked very promising.”
HCRS is a nonprofit corporation that contracts with the state of Vermont to provide services to mentally ill and developmentally disabled people in Windsor and Windham counties. Each year it serves 4,500 people, according to an informational video distributed by HCRS.
HCRS lost $1.4 million as it posted total revenue of $46.8 million in the fiscal year that ended June 30, 2014, according to its audited financial statement. Payments from Medicare, Medicaid and private insurance companies for clients services accounted for about 70 percent of that revenue, while state contracts accounted for about 19 percent. In 2014, voters at 39 town meetings in communities served by HCRS decided to provide financial support to the agency, according to a news release posted on its website.
The California venture never lived up to expectations. HCRS Chief Financial Officer Hal Moore told the agency’s board of directors at a meeting in August 2012 that the homes would generate $2.8 million in annual revenue. The revenue would come from seven homes, all located within a 50-mile radius in the Los Angeles area, he told the board.
But losses mounted as HCRS experienced delays in getting the homes operating and filled with revenue-generating residents. Annual revenue never exceeded $1.7 million.
Moore did not respond to requests for comment.
Karabakakis said HCRS had been searching for ways to respond to a cloudy economic and financial outlook in its home state, especially for agencies that depended for revenue on the state-federal Medicaid program of insurance for low-income families.
“Some years ago we were looking for other, additional opportunities for growth and (new) revenue sources,” he said in an interview.
The agency was looking for new services and programs to offer “that do not rely on Medicaid funding as the state of Vermont budget shortfalls make an expansion in the Medicaid funding area doubtful,” Tim Maney, then the agency’s treasurer, told his fellow directors, according to minutes of a September 2009 board meeting.
That led the agency to look at California and Texas, large states that had set out to return to communities and smaller facilities thousands of people housed in large institutions for people with disabilities, Karabakakis said.
HCRS decided to focus on California after Steven Roberts of the Southern California Integrated Health & Living Project found HCRS’ website and contacted it about providing services in California, Karabakakis said.
Roberts could not be reached for comment.
California, the nation’s most populous state, seemed like a promising choice.
The state had decided that too many of its roughly 250,000 residents with developmental disabilities were housed in large facilities and that efforts should be made to move more into community residences. The population of the state’s large institutions had already fallen from about 5,700 in 1994, to about 2,100 in June 2010, and has since fallen to about 1,100, according to Katie Hornberger, director of the office of client rights advocacy for Disability Rights California.
California’s regional agencies turned to outside vendors to provide homes for former residents of its large institutions, she said: “For providers this (was) a big business opportunity.”
The people who conceived and executed HCRS’ westward expansion could not be reached for comment or declined to talk on the record about the undertaking. This account of the venture was assembled from reviews of minutes of HCRS board meetings, websites of HCRS partners and regulators in California and other sources.
HCRS applied for vendor status and signed contracts with two California agencies responsible for finding providers that would supply homes to former residents of large state institutions. HCRS also obtained at least $375,000 in grants to develop the group homes, and proceeded to lease residences, purchase vans, get licenses and hire and train staff.
HCRS hired former Newport, N.H., School Board member Anthony MacConnell to oversee the venture, which the agency referred to as HCRS West. MacConnell declined a request for an interview.
During 2011 and 2012, Hayward and other HCRS executives flew to California to set up offices and meet with agency personnel and regulators.
Yet even as the HCRS team was pursuing opportunities in California, some of its local partners were expressing worries similar to those that had originally prompted HCRS’ interest in distant projects.
For example, in a June 2011 budget update, the executive director of the Westside Regional Center worried that California’s “finances continue to be a mess.” For a future vendor, this observation was especially ominous: “Having millions of dollars less than we did last year is a challenge to us and those who depend on us. We obviously can’t purchase services to the degree we once did.”
By some measures, things went well. HCRS was “an outstanding service provider,” said Nancy Spiegel, the director of information and development at Harbor Regional Center, which selected HCRS to operate several homes. “They did an excellent job.”
But the expected financial rewards did not follow. Maney told the HCRS board in May 2012 that the agency had lost $316,000 in California “due to state delays in getting the homes up and running,” according to the minutes.
HCRS’ California partners did not deliver on their promise to quickly fill the homes with residents once they were licensed and staff were on the payroll, according to Dougherty.
Filling the homes went slower than expected, he said, in part because “families had a significant role in determining whether the people would be moved.”
Hornberger, the California advocate, offered this thought on HCRS’ westward woes: “If you are not really familiar with our system, and the layers of bureaucracy in our system, it can be surprising.”
And even after the surprise faded, HCRS’ results in California didn’t improve.
In February 2013, HCRS’ auditor wrote in a management letter that HCRS West had already lost more than $700,000, including $457,000 in the fiscal year that ended June 30, 2012, and $250,000 more in the succeeding six months.
The auditor urged HCRS to contact California officials to seek to have them kick in additional money to “share the enormous economic loss” the project had inflicted on HCRS.
If California authorities said no, the auditor added, “we recommend you pursue terminating this program as soon as possible. Based on results to date this venture does not appear to be feasible for the agency.”
In June, the HCRS board voted to send a letter to its California partners — Harbor Regional Center and Westside Regional Center — setting a deadline for identifying clients for HCRS’ homes, according to the minutes. Otherwise, the letter would say, “HCRS will pull its services out of California, pull out of the leases on the homes, and seek reimbursement for all losses incurred.”
While the minutes do not show whether that letter was ever sent, that discussion did presage HCRS’ departure from California which, according to the minutes, was completed in April 2014.
That exit was accomplished by transferring ownership and operations of HCRS’ California homes to other agencies.
Spiegel said HCRS left California in good standing. “For business reasons, they decided to leave the state and go back where it was more feasible for them to operate, closer to home.”
The transition of HCRS’ homes to new service providers went well, she said.
Losses in the California operation — $1.8 million in the three-year period that ended June 30, 2014 — helped push its parent agency, HCRS, to $1.4 million in losses for the same period.
In fiscal 2014, an operating loss that size — $1.4 million — contributed to a decline in the agency’s net assets, to $3.1 million from $4.3 million a year earlier.
HCRS brought back to Vermont four vans that had been purchased to use at its California homes. MacConnell stayed behind as a manager for a company that took over some of those homes.
Meanwhile, Karabakakis noted, back in Vermont the demand for HCRS’ services had surged.
In 2011, Tropical Storm Irene destroyed the state hospital in Waterbury that treated the mentally ill. Act 79, a mental health reform law that passed the next year, committed the state to launch new community-level programs and provided some additional funding. HCRS opened or acquired several new facilities in southeastern Vermont and initiated several new programs.
And hardly anyone noticed the rise and $1.8 million fall of HCRS West, which Margolin, the former board vice president, summed up as “a revenue producing (project) that didn’t materialize.”