Execs earn big money at drug treatment center
In an industrial zone a few blocks off the 101 Freeway, the Tarzana Treatment Center relies on government contracts and nonprofit tax status to serve drug addicts in poverty or trouble with the law.
A clerk sits behind protective glass in the lobby. Down a hallway in the detox wing, down-and-out men are curled on their cots. The coat hooks in the rooms flip down so patients can’t hang themselves.
It hardly seems like the headquarters of a $45-million-a-year business.
Tarzana dwarfs most other nonprofits in the same line of work. By far the largest user of public funds for drug treatment in Los Angeles County, it draws 85% of its money from taxpayers.
Its top executives have also made it a lucrative operation for themselves, with compensation and business arrangements that are highly unusual in the industry.
Chief operating officer Albert Senella earned $428,057 in 2007, soaring above the highest paid county employee -- the medical director of Harbor UCLA Medical Center, which has a budget 12 times Tarzana’s. Chief executive Scott Taylor made $330,732 working 32 hours a week.
The two men collected hundreds of thousands more in deferred compensation in recent years, boosting their earnings far above those of top executives at comparably sized treatment centers, such as Walden House in San Francisco, Gaudenzia in Norristown, Pa., and Gateway Foundation in Chicago, according to federal tax filings.
And that’s not counting income from other arrangements involving legal services and real estate that several industry experts said they had never before seen at a nonprofit.
Taylor is also a lawyer with a long-standing contract to provide Tarzana with legal counsel. Tax filings show the deal paid him $237,956 in 2007 -- on top of his salary.
Taylor, Senella and two other board members also have ownership stakes in six properties that Tarzana leases as its headquarters and treatment sites.
In 2007, the four men collected rent of more than $2.27 million.
Taken together, the compensation and the other financial deals raise questions about Tarzana’s public mission and about how the government allocates drug treatment dollars, experts in drug treatment and nonprofits said.
Although Tarzana gets more than double the public funding of its closest competitor, government payers can’t say whether its patients fare any better than those at other centers after treatment. Nationally, no one comprehensively tracks whether patients use drugs again, find work or get arrested.
Steven Winston, who earns $173,000 a year as the highest-paid executive at Daytop Village, a New York-based nonprofit treatment center that takes in $53 million a year, was incredulous at the compensation at Tarzana.
“These people are making what for-profit people make,” he said. “It’s anathema to what real nonprofits and real charitable organizations do.”
Frances Hill, a professor at the University of Miami specializing in nonprofit tax law, said conflicts of interest were inherent at Tarzana because the chief executive wears so many other hats: chairman of the board, lawyer and landlord.
“My jaw is dropping over this,” she said.
The Internal Revenue Service allows self-dealing as long as a nonprofit can show that it considered alternatives and found that they were not as good a deal, said Marcus Owens, who led the IRS’ tax exempt section during the 1990s.
“These are all hot-button issues for the IRS right now,” he said.
Tarzana executives said they are meeting all legal requirements. They said board members always sought the best deal for taxpayers, disclosing potential conflicts of interest in tax filings and abstaining from votes on those matters.
The pay, they said, reflects decades of success achieved by chasing government grants and expanding services. Although the business is nonprofit, Senella said, “we are allowed to make money as individuals.”
The federal government places a $196,700 cap on what an executive can earn from a contract, but that does not restrict what one can collect from other sources.
Senella and Taylor said they comply with that cap because much of what they earn comes from a subset of patients who pay out-of-pocket or with insurance, an assertion the county confirmed. In 2007, that was $7 million of the center’s $45 million in revenue.
“That doesn’t impress me,” said Ken Berger, head of the nonprofit watchdog group Charity Navigator, explaining that such high compensation undermines a nonprofit’s core mission of public service.
If the executives weren’t paid so much, he asked, “how many more services could be provided to people who need them?”
An industry was born in the ‘70s
In the early 1970s, California shuttered its drug rehabilitation programs at state mental hospitals and, along with many other states, began contracting the work out.
An industry was born. From the early days of fly-by-night operations run by former addicts in rented garages, the treatment industry has grown rapidly, relying largely on federal dollars passed through states and counties.
Federal grants for drug treatment now total more than $2.5 billion a year. But the basic requirement has remained the same: Only nonprofits need apply. Nobody was supposed to get rich.
Tarzana, named Free Men Inc. when it opened in 1973, started as a collaboration between Taylor, a young lawyer, and a social worker who had run a drug program at a state mental hospital.
Senella, a high school dropout and a former patient at that hospital program, was among the first hires, he said. He started as a 20-year-old drug counselor and climbed the ranks.
“Albert has the blood of Tarzana,” said Silvia Cadena, who joined Tarzana as a bookkeeper in 1979 and now earns $280,422 a year, plus deferred compensation, as chief financial officer, the No. 3 executive.
In the late 1970s, after drastic state budget cuts, the nonprofit adopted a more entrepreneurial strategy, Senella said. It began expanding its services, eventually adding mental health programs, basic medical clinics and HIV treatment, which attracted more government funding and qualified Tarzana for some private insurance plans.
With about 600 employees, the center treats more than 6,000 people a year for drug addiction and alcoholism, about 2,000 of whom are in its residential programs.
In Sacramento, Senella has gained the ear of state legislators as head of the California Assn. of Alcohol and Drug Program Executives, an advocacy group that often lobbies for drug treatment funding.
He was an outspoken proponent of Proposition 36, the successful state ballot measure in 2000 that allowed some drug offenders to get treatment instead of jail time and pumped $120 million a year into the industry.
If Senella is the public face of Tarzana, Taylor is its management guru. He has always been president of the board, and in the mid-1980s he took over as chief executive.
It was natural for him to handle contracts, corporate filings and some litigation for Tarzana, said Bruce Glickfeld, an outside attorney who said he steps in when Taylor has a potential conflict of interest.
Taylor’s legal contract has never been put out for competitive bid, but the amount is less than Tarzana would have to pay an outside lawyer for the same work, Glickfeld said.
Glickfeld also defended real estate deals among board members as fair and in taxpayers’ best interest, saying that no one was collecting inordinate rents.
In the early 1990s, the building that Tarzana had been renting as its headquarters was for sale. Taylor and Lane Weitzman, a real estate investor on the board, saw buying it as a way to ensure that the business would not have to move, Taylor said.
Taylor, Weitzman and Weitzman’s brother, Barry, bought a 50% stake in the building, the first of six arrangements that allowed board members to collect rent from Tarzana.
Many patients are repeat customers
With long waiting lists for residential drug treatment in L.A. County, there is never a shortage of patients, many of them repeat customers.
Simon Yebio grew up in Alexandria, Va., got hooked on crack cocaine and methamphetamine and wound up on skid row in Los Angeles, he said. He is now in residential treatment at Tarzana headquarters; it’s his first time at Tarzana but, at age 29, his 14th time in taxpayer-funded rehab.
“As far as being professional, this place blows the others out of the water,” he said.
Yebio said he’s been clean since he moved in late last year, but he is not hopeful about what will happen when he reenters the outside world.
“I don’t think it is going to work,” he said of his treatment.
L.A. County, like most other jurisdictions, doesn’t keep track of what happens in cases like Yebio’s. It is considered too expensive, treatment experts said. Public funding of the treatment industry has largely been a product of tradition: Treatment centers with contracts tend to get more contracts, interviews and records show.
Each typically runs for two or three years and, as long as money is available, renewal is almost a given.
“They don’t change hands very often,” said Jim Gilmore of Behavioral Health Services, L.A. County’s second biggest provider with a $16.8-million budget.
The county routinely conducts audits to monitor how money is being spent. But the incomes of Tarzana executives have not been questioned.
“Everyone agrees that they are one of the better providers in the area,” said John Viernes Jr., director the county Alcohol and Drug Program Administration. “We don’t tell them what to pay their executives.”
Tarzana executives said their compensation is based on a report by an independent consultant who looks at the going rates in the market, but they declined to release the report.
“It’s pretty tough to compare us to anybody,” Taylor said, explaining that Tarzana offers a range of services beyond basic drug treatment. “I think we are so unique.”
Senella said the board of directors has “gone through great lengths to make sure that what we are doing is done openly and properly.”
But experts in nonprofits said the board itself is problematic.
Six of the nine members were receiving income from Tarzana -- three executives, two landlords and a psychologist who until recently was paid $26,500 a year as a consultant, tax filings show. Three directors have been in place for at least 30 years, three more for at least 20 years and one for 15.
“It shouldn’t be an old buddy network,” said Berger. The head of Charity Navigator said he favors term limits. He also explained that industry best practices restrict compensation to a third of board members or fewer.
The board may soon be tested by some difficult financial choices.
To help rein in the state’s budget deficit, Gov. Arnold Schwarzenegger wants to slash funding for drug treatment. Tarzana would lose about $10 million a year, said Senella, who visited Sacramento last month to lobby against the governor’s proposal.
With $12 million in cash reserves, Tarzana is in a better position than many centers -- a testament to its management, Senella said.
Still, he said, employees would lose their jobs; two dozen were laid off last year in response to state budget cuts. Salaries could go down, including those of executives.
“The system is just too underfunded,” he said.
Researcher Maloy Moore contributed to this report.