JOHN HOPE SETTLEMENT HOUSE
Limited Review Report
March 2017
Dennis E. Hoyle, CPA
Auditor General
Office of the Auditor General
General Assembly - State of Rhode Island
Office of the Auditor General
State of Rhode Island and Providence Plantations - General Assembly
Dennis E. Hoyle, CPA - Auditor General
oag.ri.gov
33 Broad Street  Suite 201  Providence, RI  02903-4177
tel: 401.222.2435  fax: 401.222.2111
March 3, 2017
JOINT COMMITTEE ON LEGISLATIVE SERVICES:
SPEAKER Nicholas A. Mattiello, Chairman
Senator M. Teresa Paiva Weed
Senator Dennis L. Algiere
Representative K. Joseph Shekarchi
Representative Patricia L. Morgan
We were requested by the Joint Committee on Legislative Services to perform a limited review of the John
Hope Settlement House, a private non-profit entity which primarily operates a child-care center in Providence, Rhode
Island.
We have completed our review and our report is contained herein as outlined in the Table of Contents.
Sincerely,
Dennis E. Hoyle, CPA
Auditor General
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John Hope Settlement House (JHSH)
Limited Review Report
Table of Contents
page
Executive Summary
1
Scope and Objective
2
Background
2
Financial Status
4
Status of Child-Care Licensing by the State of Rhode Island
8
Summary of Results of Most Recent Independent Audit
of JHSH Financial Statements – Fiscal 2015
9
JHSH Liabilities
10
Property Challenges – JHSH facility
12
Summary of Recommendations to Address Current Operating Challenges
and Restore Financial Confidence and Accountability
13
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Executive Summary – Limited Review – John Hope Settlement House
John Hope Settlement House’s (JHSH) financial condition has steadily deteriorated. Operating reserves
have been depleted and current operations are almost entirely dependent on one income stream of federal/state
revenue for child care. Program operation and related revenue are now threatened by the revocation of JHSH’s child
care license by the Department of Children Youth and Families. The license revocation has been temporarily stayed
by the Superior Court. Should the license be permanently revoked, it is doubtful JHSH could sustain operations and
would likely need to seek receivership.
If JHSH is allowed to continue to operate its child care center, we believe an aggressive and strategic plan
would need to be implemented immediately to address the ongoing operating challenges that would continue to exist.
This strategic plan would be designed to potentially restore financial confidence and accountability necessary for
JHSH to sustain operations and provide quality services. Even with effective implementation of such strategic
efforts, JHSH will continue to be challenged by the mismatch of its current operations to its existing facility and the
related capital and operating challenges of that facility. Seeking a strategic operating partner with financial,
administrative and operating strengths that compensate in part for JHSH’s weaknesses may be a necessary reality.
JHSH exhibits multiple indicators of financial stress and lacks effective controls over its accounting and
financial reporting functions. JHSH has lost other key operating grants totaling more than $500,000 annually due to
its lack of financial controls and financial status. With these constrained resources, JHSH struggles to make the
financial and operating improvements necessary to demonstrate that it may again qualify for restoration of other
grants.
JHSH’s most recent audited financial statements available are for the fiscal year ended June 30, 2015.
These financial statements are outdated and consequently do not provide an accurate view of its current financial
position. Fiscal 2016 and projected 2017 financial information is needed to accurately assess JHSH’s current
financial condition; but that information could not be provided by JHSH. No auditor has been engaged to audit
JHSH’s fiscal 2016 financial statements.
Due to control weaknesses and “lack of sufficient management oversight of the financial function”, JHSH’s
auditor’s issued a modified independent auditor’s report on its fiscal 2015 financial statements. The report included
multiple matters of emphasis and the auditor’s management letter outlined numerous issues – many of which existed
in the prior fiscal year. The modified opinion issued by the auditors and the quantity and nature of management
comments reported highlight the precarious financial status of JHSH.
JHSH acquired an additional property years ago for which a mortgage balance of approximately $270,000
remains. The property is vacant and not used by JHSH. Given that there is neither a need for or a clear vision to
use the Higgins Avenue property, JHSH should dispose of the property as soon as possible to eliminate the diversion
of other needed operating resources to meet the monthly mortgage payments. Whether, upon sale, the sale
proceeds would cover the outstanding mortgage balance is not known.
There is a substantial mismatch of the JHSH’s physical space that it must heat, cool and maintain in light of
its current level of service operations. The JHSH facility at Thomas Whitten Way requires energy efficiency
improvements and other renovations/repairs for which resources are lacking. Current operations, which consist of
child day care activities, use a relatively small portion of the overall building space. Efforts to rent the space to other
organizations have yielded some additional revenue; however, this presents some concern given the operations of a
child care center at the same location.
Recommendations to address current operating challenges and restore financial confidence and
accountability are included in our report for the purpose of providing a basic outline for a needed strategic effort to
continue operations should JHSH’s childcare license be restored.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
SCOPE AND OBJECTIVE
We performed a limited review of the John Hope Settlement House (JHSH) which focused primarily on
assessing the organization’s financial stability in light of recent losses in grant funding and questions regarding
whether the organization should be eligible for future grants.
We did not perform an audit of JHSH or the financial statements of the John Hope Settlement House and
we have not performed independent tests of the data provided to us by the JHSH which became the basis for our
analysis.
We utilized available financial information from annual audits of JHSH financial statements including
management comments resulting from those audits and budget information to the extent available. We also
interviewed key operating staff of JHSH and Board members. We additionally made inquiries regarding the licensing
status with State of Rhode licensing agencies (Department of Children, Youth and Families and the Department of
Health) and the RI Department of Human Services which provides child care payments for eligible children.
BACKGROUND
Organization and Governance
The JHSH is a Rhode Island nonprofit corporation exempt from income taxes as a public charity under
Section 501 (c) (3) of the Internal Revenue Code. The purpose of the organization is to provide programs for the
purpose of strengthening families, character building, community betterment and development of self-reliance and
personal pride among residents of Greater Providence. Established nearly 90 years ago, JHSH is governed by a 16
member Board of Directors.
Location
The JHSH owns and operates from a 33,500 sq. ft. building located at 7 Thomas Whitten Way, Providence,
Rhode Island as shown below.
Source: City of Providence – Vision Appraisal
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
Programs
JHSH’s principal source of revenue is child care payments from the RI Department of Human Services for a
year round day care program with a reduced enrollment during the summer months. The childcare payments from
the State are mostly from federal sources (Child Care and Development Fund Cluster – CFDA 93.575 and CFDA
93.596). Payments are made biweekly based on enrollment and attendance. Parent copay amounts vary depending
on income.
Total child care enrollment at June 30, 2016 was 128 children. Enrollment for 2017 was projected at a total
of approximately 121 children – 66 in the School Age Program and 55 in the Early Learning Center Program.
Child care facilities are licensed by the State of Rhode Island – Department of Children, Youth and Families.
JHSH rents portions of its facility to other organizations – gross rent revenue for fiscal 2015 (latest year
available) was $51,475.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
FINANCIAL STATUS
In recent years, JHSH’s financial condition has steadily deteriorated. Operating reserves have been
depleted and current operations are now almost entirely dependent on one income stream of federal/state revenue
for child care. That program operation and related revenue is now threatened by the revocation of JHSH’s child care
license by the Department of Children youth and Families (DCYF). Revocation of the child care license would
eliminate the last major operating activity and revenue source for JHSH thereby severely limiting its ability to continue
as a going concern.
JHSH was unable to provide current operating results for the fiscal year ended June 30, 2016 and a fiscal
2017 year to date estimate. Consequently, this impeded our ability to obtain a more current assessment of financial
condition. The most current and reliable financial data available was from JHSH’s audited financial statements for
the fiscal year ended June 30, 2015 (completed in October 2016).
Continued loss of funding and prohibition to participate in Federal/State programs
Recently, JHSH has lost other key sources of operating revenue as detailed below:
Grant Funds Lost
USDA grant from RIDE for meals program for FY15 (cancelled 2014)
$ 132,899 *
Community service grant from RI General Assembly for FY17 (cancelled 2016)
Federal CDBG grant award for building improvements (cancelled June 2016)
Total
300,000
137,582
$ 570,481
* Actual receipts $254,862 in FY13 and $132,899 in FY14.
In 2014, because of poor accounting controls over federal grant receipts, JHSH could not account for over
$35,000 in USDA reimbursements for meals. As a result, the RI Department of Education decertified JHSH from
participating in the federally funded meals program for children enrolled in the day care center program. And the
federal grantor agency (USDA) cancelled the federal award for the meals program, which had provided receipts
totaling $254,862 in FY 2013 and $132,899 in FY 2014, respectively. Since then, JHSH has received no additional
funding for the meals provided to children in its care.
The loss of funding has forced management to reduce the level of services and programs offered.
Currently, JHSH principally operates one program.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
Weaknesses in financial management
JHSH exhibits multiple indicators of financial stress and lacks effective controls over its accounting and
financial reporting functions. Operating reserves have been depleted and, coupled with its current dependence on
just one primary source of funding; JHSH struggles to make the financial and operating improvements necessary to
demonstrate that it may again qualify for restoration of other grants.
The following summarizes our observations regarding JHSH’s financial management:
•
The independent auditor’s report on JHSH’s 2015 financial statements was modified and management letter
comments identify many uncorrected deficiencies and weaknesses.
•
JHSH Board of Directors and staff have not articulated a clear vision regarding program operations and a
plan to restore financial confidence and accountability.
•
The Board of Director’s has not yet engaged an independent auditor to perform an audit of JHSH’s fiscal
year 2016 financial statements.
•
Reliable operating results for fiscal 2016 (unaudited) could not be provided by JHSH. A trial balance for the
fiscal year ended June 30, 2016 was not final and out of balance. The results of operations for the fiscal
year ended June 30, 2016 is unknown – draft financial statements for the fiscal year ended June 30, 2016
have not been prepared.
•
JHSH does not have a complete and balanced budget for the current fiscal year ended June 30, 2017 and
has not prepared budget and actual reports to monitor budgetary compliance and to project operating
results for the fiscal year.
•
JHSH has insufficient administrative, finance and accounting staff to manage its current operations and to
develop and implement a plan to restore financial accountability. JHSH had only a part-time financial
officer/executive director who has since left.
•
In recent years the organization has experienced unstable management – including frequent turnover of
board members, executive director and other staff.
•
With its limited resources, JHSH is challenged to attract and adequately compensate direct childcare and
other administrative staff.
•
Debt service on the mortgage for a property (Higgins Avenue property in Providence) that is vacant diverts
cash flow and operating funds away from core operations. JHSH has not presented a plan to either use or
dispose of this property.
•
Energy and operating costs for JHSH’s primary facility are high due to the inefficiency of the heating and
cooling systems. The actual space used for day care operations is only a portion of total available space.
•
JHSH had a $100,000 line of credit with City of Providence – an outstanding balance of $50,000 is in
default.
•
JHSH rents portions of its facility to other organizations - while this generates some additional revenue; this
presents challenges and safety concerns in light of the child care operations at the same location.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
Financial summary
JHSH’s most recent audited financial statements available are for the fiscal year ended June 30, 2015, and
are nearly 2 years old and consequently do not provide an accurate or relevant view of current financial position.
Financial position and results of operations have been summarized in the tables on the following pages.
John Hope Settlement House - Summary Balance Sheet
Fiscal 2015
Assets
Cash
Receivables
Other
Net property and equipment
Higgins Street property
$
157,150
99,092
23,562
2,581,890
200,000
3,061,694
$
204,551
92,920
16,988
2,667,644
367,292
3,349,395
$
168,730
91,667
50,000
280,602
590,999
$
216,760
91,667
50,000
290,424
648,851
$
2,470,695
$
2,700,544
$
Liabilities
Payables
Post retirement benefits liability
Line of credit
Mortgage payable
Net assets
Fiscal 2014
source: JHSH audited financial statements - fiscal year ended June 20, 2015 dated October 27, 2016.
At June 30, 2015, JHSH had net assets of $2.5 million; however, that results from the book value of its
building and equipment. Such assets, for accounting purposes, are carried at historical cost which is not indicative of
current market or net realizable value of the property.
Available working capital is minimal and liquid operating reserves are non-existent.
As shown on the following page, operating revenues and donations covered operating costs before
depreciation in fiscal 2015. After depreciation, results of operations before the write-down in the carrying value of
the Higgins Street property resulted in a decrease in net assets of $80,465. The total decrease in net assets was
$229,849, which included the write down for the carrying value of the Higgins Avenue.
Fiscal 2015 operating expenses do not reflect certain full-time administrative costs that we would consider
necessary to sustain operations.
Fiscal 2016 and projected fiscal 2017 financial information would be the most value in assessing JHSH’s
current financial condition; however, data is not available.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
John Hope Settlement House - Summary of Statement of Activities
Fiscal 2015
Revenue
Government agencies
Parent fees
Rental income
Contributions
Other
Total
$
$
Fiscal 2014
859,195
96,176
51,475
62,039
4,974
1,073,859
$
$
$
682,427
149,669
51,250
22,204
905,550
(140,579)
764,971
$
847,036
81,092
16,250
77,944
964
1,023,286
Expenses
Program Services
Management and General
Fundraising
Rental expenses
Total expenses
Less Depreciation
Expenses net of depreciation
$
830,796
230,388
73,955
19,185
1,154,324
(127,416)
1,026,908
Change in net assets before other
income and expense
$
(80,465)
$
117,736
Change in net assets before
depreciation and other income and
expense
$
46,951
$
258,315
Write-down in carrying value of
Higgins Avenue property
$
(149,384)
$
(312,715)
$
(194,979)
$
$
Cumulative effect of prior period
adjustment
Change in net assets
$
Net assets beginning
Net assets ending
(229,849)
$
2,700,544
$
2,470,695
2,895,523
$
2,700,544
source: JHSH audited financial statements - fiscal year ended June 20, 2015 dated October 27, 2016.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
STATUS OF CHILD-CARE LICENSING BY THE STATE OF RHODE ISLAND
JHSH’s principal source of revenue is federal child care payments from the RI Department of Human
Services for day care programs. Revenue from DHS totaled $706,783 for the fiscal year ended June 30, 2016.
In November 2016, the RI Department of Children, Youth and Families (DCYF) revoked JHSH’s license to
operate the child day care center because of violations cited by DCYF during inspection visits over an extended
period of time. Previously, JHSH was operating under a provisional or temporary license and had been required to
submit corrective action plans to address noted deficiencies. The reasons for the revocation involve “ongoing
regulatory violations relating to child care staff background checks and administrative staffing mandates”.
On February 21, 2017, a hearing officer within the Executive Office of Health and Human Services affirmed
DCYF’s revocation of the child care license.
The timeline of recent DCYF actions regarding the JHSH child care license are shown below:
September 2015 – JHSH on probationary licensing status.
October 28, 2016 – DCYF informs JHSH that it is considering revoking license – JHSH may request an
administrative meeting.
November 7, 2016 – Administrative meeting held.
November 15, 2016 – DCYF notifies JHSH that license for child care is revoked effective November 29, 2016.
JHSH informed of right to appeal decision within 20 days.
December 2016 – Appeal hearing held on December 9 and 23.
February 21, 2017 – Hearing officer affirmed and upheld DCYF license revocation – JHSH is instructed to
cease child care operations by February 24, 2017. Hearing officer’s decision may be appealed to the Rhode
Island Family Court.
February 23, 2017 – Superior Court grants stay of DCYF license revocation – hearing scheduled for April 17,
2017.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
SUMMARY OF RESULTS OF MOST RECENT INDEPENDENT AUDIT OF FINANCIAL STATEMENTS
JHSH had an independent audit of its financial statements performed for the fiscal year ended June 30,
2015. The auditors issued their report on October 27, 2016. No audit has yet been arranged or conducted of
JHSH’s fiscal 2016 financial statements.
The auditor’s issued a modified independent auditor’s report on JHSH’s fiscal 2015 financial statements and
cited the following reasons for the modification:
•
The auditors were unable to obtain sufficient evidence about the correct classification of revenue and
expenses for the year ended June 30, 2015 because “there were few appropriate accounting controls
employed during the fiscal year”. “Consequently, we were unable to determine whether any
adjustments were deemed necessary to the reported items of revenue and reported items of expense”.
•
Due to Board composition changes and cash flow issues which caused staffing problems, “there was a
lack of sufficient management oversight of the financial function”.
The independent auditor’s report also included the following emphasis of matters:
•
JHSH is in default on its post-retirement benefits payable agreements.
•
JHSH is in default of a line of credit agreement with the City of Providence.
•
JHSH is party to a number of lawsuits either as a plaintiff or a defendant.
•
JHSH received notice that $437,582 in State and City grants designated for fiscal 2017 had been
suspended pending further review by State and City officials.
•
JHSH suspended contributions to its retirement plan effective July 1, 2010; however the plan
administrator claims an additional pension liability exists which JHSH disputes.
•
JHSH restated its 2014 financial statements to correct the recording of the certain capital assets.
The auditor’s also issued a management letter document that included numerous issues – many of which
existed in the prior fiscal year. Eleven of the issues previously cited in the JHSH 2014 were repeated since
corrective action was not deemed sufficient to eliminate the comment.
Certain of the management letter issues concerned voided checks, documentation of cash receipts,
documentation of expenditures, Board approval of operating budgets, and a lack of segregation of duties.
The modified opinion issued by the auditors and the number of matters emphasized in that report highlight
the precarious financial status of JHSH.
An auditor has not been engaged to perform an audit of JHSH fiscal 2016 financial statements.
Timely completion of annual audits that are generally free from auditor report modifications and significant
audit findings are a necessary prerequisite to restoring confidence in JHSH’s financial management.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
JOHN HOPE SETTLEMENT HOUSE LIABILITIES
Higgins Avenue Property
JHSH acquired an additional property many years ago for which it has a substantial outstanding mortgage
balance ($280,602 at June 30, 2015) and is required to make monthly payments.
The property is located at 11
Higgins Avenue in Providence. Built in 1885, it has approximately 5,100 sq. ft. of living area on 4 floors.
Source: City of Providence – Vision Appraisal
The property is vacant and is not used in any program operations of JHSH. There are no current plans for
the property. Due to the required mortgage and utility payments and without any rental revenue, ownership of this
building represents a negative cash flow and uses operating revenues intended for program activities. The building
would require substantial repair/renovation to bring it to a potentially usable condition.
The original mortgage note payable dated April 27, 2006 was for $375,000, carried an interest rate of 5.5%,
and provides for 360 monthly principal and interest payments of $2,129. The note is secured by the property. The
minimum principal payments due under the terms of the mortgage note are as follows
Year ended
June 30:
2016 $ 10,376
2017
10,962
2018
11,580
2019
12,233
2020
12,923
Thereafter
222,528
Total $280,602
(Source – JHSH 2015 audit report dated October 27, 2016)
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
The JHSH audit report for the fiscal year ended June 30, 2015 included a reclassification of this asset to
“Idle Property” and an adjustment to the carrying value of the property from $349,384 to $200,000. We are not aware
of a current appraisal to determine the actual market value of the property. Whether, upon sale, the sale proceeds
would exceed the outstanding balance on the mortgage and transaction costs is not known.
Given that there is neither a need for or a clear vision to use the Higgins Avenue property, coupled with the
negative operating impact of zero revenue and monthly required mortgage payments, JHSH should immediately
begin to market the property for sale and dispose of the property as soon as possible.
Line of Credit with the City of Providence
The agency has an interest free line of credit for $100,000 with the City of Providence that was arranged in
January 2013. The outstanding balance at June 30, 2015 and 2014 was $50,000. Beginning in February of 2014,
JHSH was to begin making monthly payments of $5,000. The agency is currently in default on the note and no
agreement has been reached with the City for alternative payment arrangements.
Credit Card Debt
JHSH had a bank credit card with a balance owed of over $15,000. During FY 2016, JHSH paid $5,000 and
the bank wrote off the remaining $10,000 balance.
Pension Plan Related Obligations
JHSH suspended contributions to its pension plan effective July 1, 2010. The retirement plan administrator
claims that $91,667 in retirement plan payments are owed by JHSH at June 30, 2015. JHSH’s fiscal 2015 financial
statements indicate that JHSH disputes the assessment.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
PROPERTY CHALLENGES - JHSH FACILITY
The JHSH facility at Thomas Whitten Way is in disrepair. There is a substantial mismatch of the JHSH’s
physical space that it must heat, cool and maintain in light of its current level of service operations. Many years ago,
the building owned by JHSH housed multiple service activities and needed the physical space. Current operations
which consist of day care activities use a relatively small portion of the overall building space. Efforts to rent the
space to other organizations has yielded some additional revenue; however, addressing overall compatibility and
safety given the operations of a child care center at the same presents some concerns.
The facility has high operating costs, including high utility costs for heat, light and power. The heating and
air conditioning systems need replacement and JHSH cannot fund the need improvements. In June of 2016, based
on a recommendation from the federal grantor agency (US HUD), the City of Providence cancelled a tentative award
of $137,582 of federal Community Development Block Grant (CDBG) funds to finance the needed improvements.
Ongoing financial stress was cited as the reason for this action.
Office of the Auditor General
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John Hope Settlement House
Limited Review Report
SUMMARY OF RECOMMENDATIONS TO ADDRESS CURRENT OPERATING CHALLENGES AND RESTORE
FINANCIAL CONFIDENCE AND ACCOUNTABILITY
As highlighted, JHSH’s only remaining operating program is threatened by revocation of its child care
license, the ultimate status of which is now pending in Superior Court. Should the license be permanently revoked,
we doubt JHSH could sustain operations and would likely need to seek receivership. If JHSH is allowed to continue
operations of its child care center, we believe an aggressive and strategic plan would need to be quickly implemented
to address the operating challenges that would continue to exist and potentially restore the needed financial
confidence and accountability necessary for JHSH to sustain operations and provide quality services. The following
recommendations provide a basic outline for such a plan.
1. Take comprehensive corrective actions to fully resolve DCYF licensing violations and prevent recurrence.
2. Adopt a strategic plan that that addresses all the challenges currently facing JHSH – operational, financial and
governance related. Assess the sustainability of JHSH in light of its current operations, resources, and financial
challenges.
3. Seek a strategic operating partner to (1) leverage key operating management functions – administration, finance,
and child care operations; (2) provide necessary capital funding to maintain the JHSH primary facility and
expand its use; and (3) restore financial confidence and accountability.
4. Engage a qualified, full-time financial officer to assume full responsibility for the financial operations to include
implementing needed financial controls to address weaknesses identified in the 2015 audit report and
management letter.
5. Promptly obtain an independent audit of JHSH’s fiscal 2016 financial statements.
6. Take corrective action to resolve uncorrected management comment and internal control deficiencies identified
by the independent auditor in the 2015 audit.
7. Prepare and adopt a comprehensive operating budget for the fiscal year. Monitor compliance monthly.
8. Take appropriate corrective action to potentially seek to restore eligibility for the USDA federal award for the
child care center meals program.
9. Reduce outstanding debt by selling the idle Higgins Avenue property and pay-off the outstanding mortgage
balance. Seek a current appraisal of the property to guide decision making.
10. Negotiate a plan to pay off the line of credit balance (in default) to the City of Providence and the amounts owed
to the pension plan.
11. Address building deficiencies (Thomas Whitten Way property) by developing a capital improvement and funding
plan.
Office of the Auditor General
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