A Broken Arrow nonprofit organization for adults with intellectual disabilities may be close to hammering out a deal with a bank it owes more than $1.7 million to, and is taking steps to address other areas of its precarious financial situation, one of the organization’s board members told The Frontier.
Gatesway Foundation Board of Trustees member John Feary told The Frontier this week that recent actions taken by the board and management will probably have the organization on firmer financial footing in the near future, but stopped short of saying no further clients would be cut by the organization.
For months, the Gatesway Foundation has been looking to sell off large swaths of its assets — including real estate holdings, equipment, businesses and much its vehicle fleet — in addition to cutting clients, workers and client services after the 55-year-old organization found itself in deep financial trouble last year.
Last week, The Frontier reported that the organization’s financial troubles stemmed from more than just the state cuts to service provider funding and increased health care costs organization officials had publicly blamed most of the issues on. Internal organization documents obtained by The Frontier showed that while those two factors did play a role, mismanagement by Gatesway managers was also an important factor.
Members of Gatesway’s board and management refused numerous interview requests by The Frontier prior to publication of last week’s story.
Late Thursday, Gatesway issued a press release addressing The Frontier’s earlier story, saying that “The insinuations and the lack of context associated with the sited (sic) sources in this article created a narrative about current Gatesway employees, board members, and Gatesway’s fiscal position” that is “simply inaccurate and not reflective of the transformation efforts underway by the current Board of Trustees and staff.”
The media release states that the Gatesway Board of Directors stands behind the decisions and actions taken by current board president R. Greg Arend “on behalf of and with full approval” of the board. The release also requests a retraction of the story.
“Mr. Arend has never financially benefited from any contractual relationship through personal or professional endeavors and Greg has acted with the upmost integrity through his actions as a donor and volunteer board member,” the media release states. “Our hope and expectation is that a complete retraction of wrongful assertions about Gatesway and Greg Arend occur immediately and that the article is taken out of circulation.”
The press release, however, does not point to any specific errors of fact or context printed in the story. Nor did The Frontier’s story state or insinuate that Arend had “financially benefited” during his time with Gatesway.
This week, Feary, who is also executive director of the Claremore Industrial and Economic Development Authority, agreed to speak with The Frontier about the situation at Gatesway.
Records obtained by The Frontier show that after then-Gatesway board president Michael “Jim” Pacula was hired as CEO in February 2016, the organization hired several consultants and brought on other board members with ties to board member Greg Arend or Deloitte, a Big Four accounting firm for which Arend is a managing partner in Tulsa.
In May 2017, Pacula was pushed out by the board of trustees. Records obtained by The Frontier show Pacula had committed Gatesway to a three-year $101,000 lease of the north Tulsa warehouse that housed his company, Manufacturing Services & Innovations, given family members jobs at Gatesway and used the company credit card for thousands of dollars in personal expenses. The organization had also given pay raises to many of its employees, dramatically increasing payroll expenses, and had tapped into its $1.9 million line of credit with Bank of Central Oklahoma that was collateralized by half of Gatesway’s main campus. Though Pacula’s contract did not require he be given a severance package, he was provided with one worth $54,000.
Feary told The Frontier that an investigation by the board did not find Pacula had broken any laws and said it was lack of experience on Pacula’s part in managing an organization like Gatesway that created some of the issues that the board is looking to fix now, likening the situation to a professional football coach being hired to coach a professional baseball team.
“There are people who do very well in business when it’s manufacturing or whatever, and regardless of their true heart of gold and the desire they may have had individually to help an organization, sometimes people just aren’t cut out to run certain types of businesses,” Feary said. “There was no deviousness going on or stealing money or anything of that nature. It’s just a decision was made (by the board) that was later reversed.”
Feary said the board was aware of Gatesway’s lease of the north Tulsa warehouse and the organization had attempted to move some of its client employment operations — specifically its document shredding business known as DocLock — out to the warehouse. Though, he said, the board is now working to undo that decision and probably would not approve of a similar one again.
“Jim Pacula is a good man. … Jim Pacula has given countless hours and thousands upon thousands of dollars of his own money (to Gatesway),” Feary said. “Some of the decisions made — and a lot of that board is not here anymore — probably would not have been made now due to the current financial concerns we have in this industry.”
Around the same time that Pacula’s severance package was being paid, Gatesway implemented a 19 percent pay cut for many employees who had received a raise the previous year, and cut 16 “unprofitable” clients who were not living in Gatesway group homes but received its services, including Lester Carter, who had been a client for more than 50 years, records show.
Though Gatesway’s calculations show that many of the clients who were cut were costing the company less than the $50,000 given to Pacula, the decision would have been the same whether he received a severance package or not, Feary said.
And although Gatesway’s records show that spreadsheets listing the organization’s profit margin on each client were created and distributed during discussions about client cuts, the final decisions on who to cut were not made on a client-by-client basis, but based on the service types clients fell under, Feary said.
“Not to dismiss any amount of money, but when we’re trying to save and raise millions, the Mr. Pacula (severance) issue, that didn’t have anything to do with the deciding factor of whether or not we had to isolate a division or not provide services to a certain set,” Feary said. “We’re talking about millions of dollars in expenses. Those are the types of numbers we talk about when we talk about big drastic decisions being made about reduction in services.”
Feary said between 30 and 40 Gatesway clients across northeastern Oklahoma have been cut since last year, although not all were cut because of the financial issues, but that Gatesway was able to set those clients who were cut up with other service agencies before they were let go.
Shortly after Pacula’s departure, the Bank of Central Oklahoma suspended the line of credit, from which $1.75 million had been drawn. To make payroll, the organization tapped into a $1 million donation given by Broken Arrow businessman H.G. Ash that was intended to be used to build a new building on the Gatesway campus in Broken Arrow. In April this year, Gatesway was notified by the bank that the principal on the line of credit was past due, records show.
Feary said the organization is making headway in negotiations with the Bank of Central Oklahoma on paying off the past-due line of credit, though he was not at liberty to discuss details.
“We look like we’ve got an agreement tentatively in place that’s going to give us about a year to make adjustments and do what we need to do,” Feary said.
Feary also said Gatesway was notified by Ash that the donated money it had used to make payroll was no longer “restricted,” and that Arend and others at Gatesway had acted quickly when they were informed it was.
“That restriction that was perceived to be there has been clarified that it is not,” Feary said. “From an accounting standpoint, that helps the fiscal situation greatly.”
After Pacula’s departure, Arend took an active role in the organization’s finances, the records show, helping to create an “enterprise transformation program” intended to help the organization get back on its feet financially, but which involved it selling off much of its assets while laying off employees and cutting clients.
Though Arend was only a member of the board at the time (he was elected board president earlier this year) and not an official manager at Gatesway, he was given an office at the organization’s Rose District property in downtown Broken Arrow, reviewed profit margins on Gatesway clients to decide whether they should be cut or not and was directing the sell-off of much of Gatesway’s assets, the records show.
Feary defended Arend’s handling of the situation, and said the actions taken by Arend and the board have helped cut Gatesway’s expenditures losses by $1.5 million over the past year and have improved its financial situation.
“Frankly, Greg Arend is a financial whiz. He’s had a great career in financial management with Deloitte. There is nobody better you would want to have on your team to say ‘here’s the hole this organization is in due to all of these other things, let’s devise a plan and get out,’” Feary said. “This is a guy who has given countless hours and thousands and thousands of his own private money to this organization.”
The consultants with direct ties to Arend and Deloitte hired by Gatesway since 2016 all provided services to the organization for rates reduced far below market level, Feary said, even after some billed the organization for thousands of dollars in lodging and weekly travel expenses from as far away as Joplin, Missouri.
“All of them (contracts) were done at such a substantially reduced rate than what you or I could get them for for a private organization because they had ties to Gatesway,” Feary said. “Two, they were the best people for the job. Three, those consultants and the changes utilized from their recommendations and the things we’ve done, that’s what resulted in a $1.5 million reduction in deficit spending.”
Feary also said the $25,000 Gatesway paid Deloitte in April 2016 for an “operational and assessment report” that Arend and other Deloitte staff had worked on was meant to examine and make recommendations on the organization’s financial operations and structural issues, and came at a steep discount to Gatesway.
“Had that been you or I, and had Mr. Arend received any benefit for his time being charged at all for the immense amount of work he put in, that would have been easily a six-figure contract,” Feary said, adding that Gatesway was lucky to have access to one of the Big Four auditing firms like Deloitte. “If you have access to one of them at that reduced rate to help you find your way out of a big hole, you take advantage of that. That’s what we did. Thank God we had Greg and his emphasis there to do that.”
Records obtained by The Frontier show that one of the consulting firms hired by Gatesway was Joplin-based 4 J Consulting LLC, which had close ties to Arend and Deloitte. Documents also showed that Anita Pousson-Williams, a Gatesway board member from Noel, Missouri, who was brought on in 2016 and is Arend’s sister-in-law, was paid around $1,500 — at a rate of $70 per-hour — in late 2017 by Gatesway through the 4 J contract. Pousson-Williams left the board in 2018.
However, it was Pousson-Williams’ career overseeing human resources operations at Wal-Mart’s corporate offices, rather than her relationship with Arend that played the biggest role in her appointment to the board, Feary said.
“Mrs. Williams was brought on because she spent an entirety of a career in HR and knew it like the back of her hand,” Feary said. “She also had personal resources and was very generous to the organization as well.”
Records show Gatesway also paid at least one other individual through the 4 J firm who had previously worked with Pousson-Williams in Wal-Mart’s corporate human resources office.
Feary said he did not know how common it was for a nonprofit organization board member to take such an active role as Arend in the day-to-day decision-making of the organization, but in Gatesway’s case, it was an issue of using the talent that was available to it at the time.
“This is a rare instance. I can’t answer that for anybody else. I don’t know where else it’s happened,” Feary said. “We were fortunate we had it because we certainly didn’t feel like we needed to go out and find a six figure or a five figure salaried employee.”
The future of Gatesway
Many of the issues facing Gatesway are the result of years of issues that have piled up, Feary said. Decreased funding by the state (from which Gatesway gets 95 percent of its revenue), increased costs, and increased competition for clients and private sector funding by other organizations have also played a large role in the issues faced by the organization, he said.
The board’s actions over the past year have attempted to address those issues, Feary said, and have significantly improved the organization’s financial standing.
“It really looks like (in The Frontier’s previous story) we’re doing things now that are not good for the organization when, frankly, what we’ve been doing for the last year have been the best things to happen to that organization in a long time,” Feary said.
One of the major initiatives is to decrease Gatesway’s reliance on state funding, Feary said, and a major part of that is the organization’s “Adopt-a-Client” program, which allows sponsorship of Gatesway clients and groups of clients.
“Moving forward, there’s going to be a huge focus on private funding,” Feary said. “It’s a new approach we’re trying, but we’re doing everything we can to be less dependent” on government funding.
Gatesway announced this week that one of its major annual fundraising drives — the Balloon Festival — would not be held this year so that the organization could concentrate on daily operations. Prior to its cancellation, this year’s event was being chaired by a University of Tulsa student who had been appointed to the board in January, but shortly thereafter resigned from the board to accept a paid position with Gatesway to head up the balloon festival, as board members are not allowed to be paid for their services. The former board member’s paid position at Gatesway will now be cut at the end of this month, Feary said.
“The Balloon Festival every year is a huge risk. You are obligating the organization to a lot of expenses, some of them up front, and hoping you get the participation and sponsorship right at the end or on the backend,” Feary said, adding that costs to put the festival on run around $100,000. “It’s just not a good use of time or resources in these current financial times. We’re not willing to take that risk. That’s one of those tough decisions.”
Feary said many of the properties Gatesway is looking to sell are under-utilized or unnecessary to the mission of the organization. The sale of real estate and other assets, as well as plans to transfer certain assets and operations to subsidiary limited liability companies are all part of a transformation plan spearheaded by Arend and consultants for 4 J.
“I think we’re almost there on the implementation (of the transformation plan), or at least identifying the things we want to do moving forward,” Feary said. “We know it’s going to be kind of an ever-changing ‘what’s working what’s not.’ But we’ve got to get to a point where we have a business model that says ‘OK, this is working right now. Revenue and expenses are at least equal. We’re not operating in the red.’ Once we get there, let’s make that sustainable. Now, how can we increase those revenues, so we can provide more services to more clients?”
What will Gatesway look like after the transformation is complete?
“It is a lean, mean operating machine but adheres to the core principles and services that Helen Gates originally pursued,” Feary said. “Now, we want to expand, we want to grow to provide the clients the things they need, that’s community outreach, involvement, making them feel they are independent living, giving them back that integrity. Right now, that transition plan is, on the business side, operating very lean and increasing revenues through private sector donations.”
Feary said the organization has probably cut its staff as much as possible, but did not rule out cutting more clients in the future as part of the transformation.
“Employee-wise, I think we’re about as lean as we can get,” Feary said. “Client-wise, our hope is no. But again, it’s that continued look at those separate divisions and services. You have to remember too, health care costs, which is a large part of what we do, have done nothing but grow every year exponentially. So health care costs, livable wages, those are all things that go into these factors.”
Feary said the chances of Arend seeking the CEO position are “none at all.”
“I begged him to do it,” Feary said. “There’s not a chance of that.”
The 20 percent profit margin on clients Gatesway documents show Arend had pushed for is a goal, but not necessarily a bright line determining which clients might be cut, Feary said.
“You want to turn around and turn a profit so you can keep what facilities you do have and whatever vehicle fleet is necessary,” Feary said. “I speak for myself only, but if we turn around and say ‘here’s a division with only 10 percent or 15 (profit margin).’ Hey, is it in the black or is it breaking even, are we providing top services to our clients? That’s what our mission is. But we still have to have a business approach to know where we can make improvements.
“We don’t want the next group of people in 10 years to have these same issues – which they will with the state of health care — so that’s why we’re trying to change the entire culture of how this thing is funded and how we move forward.”
Feary, who has an uncle who has been a Gatesway client since the early 1970s, said the board and management are undertaking a labor of love in trying to make changes to the organization.
“My heart is committed to this organization,” Feary said. “I do it as a volunteer. We make the best decisions we can, and every one of those people on that board, and the staff even, are in the same situation I am. No one goes into that industry for the money, I can tell you that.”
However, to preserve Gatesway for future generations, the board and management have had to make tough decisions, he said.
“This is a business,” Feary said. “That’s not what it started out to be, but Helen Gates knew you have to turn this over to the community, you have to turn it over to a board, I love that approach. But it is a business. And you have to treat it as such. That’s not to be impersonal, where people think ‘oh my gosh, they don’t care about their clients.’ That’s the whole reason, is for our clients. It’s about keeping Gatesway open so we can provide those services.”
Under the organization’s bylaws, the Gatesway Board of Trustees has spots for 18 members. Between May 2017 and May 2018, the number of board members dwindled from 12 to only 6.
Feary said the board has recently added some members and is making an intentional effort to add more, though he balked at the idea of having more client family members without connections to financial, legal or business interests being named to the board.
“It doesn’t behoove the board the bring family members (on),” Feary said. “The benefit of the board is exactly why we have people like Greg Arend on there, it’s exactly why we have people like Ray Miller on there. It’s exactly why we have people on there that can give legal counsel, provide us financial advice, who are builders or developers and have needs. The board is no good if it doesn’t have contacts and relationships with people in society who have the means to help us.”