No Dishonesty Found in Loans by United Way

Top United Way officials and volunteers, including president Francis X. McNamara, used flawed judgment in lending donated money to executives of the charity, but the agency did not act dishonestly or fraudulently in authorizing the transactions, an independent citizens panel probing the finances of the Los Angeles-area United Way said Monday.

Reacting quickly to the committee’s findings, United Way officials announced that the beleaguered McNamara, who had been on a paid leave of absence since the disclosures about the controversial loans were made public this summer, will return to his post to spearhead the charity’s upcoming fund-raising campaign, already six weeks behind schedule.

McNamara said, however, that he will take an early retirement next summer, saying that the months of scrutiny have been “a very difficult period of time.”

In announcing the findings of its two-month investigation into the agency’s internal workings, the 11-member committee released a 57-page report that focused on the series of controversial loans made to five agency executives from 1980 to 1985, as well as other unusual uses of donated money. The report was released simultaneously to the press and to United Way officials.

Specifically, the panel criticized the charity for turning over almost $260,000 in donated money to bail out the now-defunct United Way credit union and for lending $150,000 to an East Los Angeles human services agency--a loan that remains unpaid.

Calling such actions “improper,” the panel recommended broad changes in the charity’s administration, including diluting the power of McNamara--who, as president, authorized the loans--and stiffening rules governing everything from personnel matters and financial planning to procuring goods and services.

Focus on Functions

“It’s their functioning,” committee chairman Robert R. Dockson said. “They have to look at their functions. We do not excuse Mr. McNamara, but we made up our minds we were not going to castigate Mr. McNamara.”

In detailing the panel’s findings, a clearly sympathetic Dockson said he and other committee members were convinced that all of the loans and other financial dealings were made in good faith.

“The good faith of these individuals involved . . . is a good defense of what took place,” Dockson said. “We found nothing indicative of dishonesty or flagrant misrepresentation.

Echoing Dockson, committee member Anelise Mosich, said, “With the benefit of hindsight, it is very easy to question and conclude poor judgment was used.”

But, added Mosich, a USC accounting professor, “We were convinced the people thought they were doing the right thing at the right time. . . . Things just didn’t work out.”

First Order of Business

In response, United Way volunteer board chairman William Kieschnick pledged to immediately implement most of the committee’s recommendations and review others. The charity’s first order of business, he said, will be “to take the United Way completely out of these employee loans.”

Kieschnick said arrangements now are being finalized to have the First Interstate Bancorp and a consortium of individuals and corporations known as “Friends of United Way” repay the United Way and assume the debt from the employee loans that are still outstanding.

He would not disclose what corporations and individuals are involved, but said the agreement will not diminish the donations those parties would normally make to the United Way.

The $320,000 in loans, which were given to the executives to cover relocation expenses, real estate loans and extraordinary medical expenses, were authorized by McNamara with backing, in some instances, from high-ranking volunteers and the members of a key United Way committee.

The largest of the loans were assumed from First Interstate Bank at the bank’s request after it became clear the United Way employees were unable to pay them off.

Most Never Repaid

The bulk of the money lent--some of which was interest-free and unsecured--was never repaid. Because interest on the largest of the loans has continued to accrue, the two loan recipients whose debts are unpaid now owe the charity more than $320,000.

In reviewing the loans, Dockson and his committee cited “deficiencies” in United Way’s record-keeping and loan-monitoring procedures.

“Believe me,” he said, “records are not abundantly clear and available at the United Way. . . . If I were Bill Kieschnick I would immediately have a very careful evaluation of all the top people of this organization. . . . Management procedures were not the best.”

Addressing the two other problem areas--the credit union bail-out and the loan to the El Centro Human Services Corp.--Dockson and the committee called for a review of lending procedures and a prohibition against involvement in business affairs that involve special expertise.

The credit union, launched in 1979, was run by people “who did not know anything about banking and banking principles,” Dockson said. As a result, loans were made based on need rather than ability to pay and that, Dockson added, “was a mistake.”

$260,000 in Subsidies

The United Way contributed almost $260,000 in subsidies to save the in-house savings institution before it was dissolved in 1981. Its poor financial condition, committee members said, was the result of “benign neglect.”

In answer to the criticism, United Way’s Kieschnick said officials have agreed that the series of credit union expenditures were “good-faith advances . . . to assist United Way employees.” He said the agency will make no attempt to recoup the losses.

But efforts are ongoing, he said, to recoup the $150,000 lent in 1985 and 1986 to El Centro, a bilingual community mental health agency.

Dockson said committee members found that the loan was made to help El Centro meet its payroll costs, despite evidence that the East Los Angeles agency had no way of promptly repaying the money.

The committee members recommended that no further loans be made to such agencies until the United Way comes up with policies for regulating them.

Among their other recommendations:

- The agency should hire an outside consultant to help redesign the charity’s management structure. Specifically, thought should be given to dividing the top job now held by McNamara between at least two persons--one to handle long-range planning and the second to oversee day-to-day operations.

Loans to Employees

- The United Way should adopt a general policy prohibiting the agency from extending credit or making loans to employees except in cases of “rare and extraordinary circumstances.” The agency under no circumstances should assume loans made by other financial institutions.

- The United Way should appoint an audit committee with power over the agency’s external and internal financial affairs.

- A personnel and management committee should be formed to oversee the recruitment and compensation of all employees, including senior management.

- The agency should review its organizational goals and produce a better record-keeping system.

Two of the key recommendations already have been implemented by the United Way. At a special board meeting Monday morning, United Way volunteers approved a new, strengthened audit committee and a personnel and development committee to “oversee all personnel functions,” Kieschnick said.

Easing the Burden

With such actions, Kieschnick said, “We’ve done our best to unburden the United Way of . . . the distractions and paralysis (caused by) these administrative problems.

“We have recognized we have some processes to improve. Change begins with acknowledgment.”

Meanwhile, a second investigation of the nonprofit agency’s finances is scheduled for completion Sept. 30. That probe, headed by Los Angeles County Counsel DeWitt Clinton, is expected to focus on whether any of the financial dealings were illegal.