It’s been a tough year for Zulma Lopez, owner of J & E Heating and Cooling in Racine.
In the past 12 months or so, the 45-year-old from Argentina became the sole owner of the 15-year-old business following a split from her former spouse and business partner.
One of her company’s major customers is the financially beleaguered Social Development Commission — a taxpayer funded anti-poverty agency that has been the subject of controversy going back at least a decade.
Now, Lopez’s company is one of at least 16 contractors nervously watching as the SDC tries to dig itself out of its latest hole.
In recent weeks, the SDC admitted it owes contractors thousands of dollars, laid off about a third of its workforce, and is undergoing a state-ordered forensic audit. The actions come after the agency announced last month in a public letter that it had “misallocated” an undisclosed amount of taxpayer money from its weatherization program.
The state has since suspended the SDC’s Weatherization Assistance Program, an action that is having a ripple effect on the agency and the community. The hit is felt by dozens of workers and companies who depended on SDC for work.
The SDC owes Lopez’s company about $95,000. As a result, Lopez said she is falling behind on her own bills and paying interest to creditors.
“This is a big chunk of money. I mean, this is not easy,” said Lopez, whose company employs about 50 people. “At some point, this could put our company down.”
The federally funded weatherization program is SDC’s largest. It is designed to reduce low-income households’ energy costs and consumption of natural resources and serves about 700 needy families annually.
During an hour-long interview in SDC’s North Avenue office, chief executive officer George Hinton admitted the organization is on “shaky” financial ground. He predicts it’ll take four years to get the weatherization program operating again, if the state lifts the suspension.
“It’s a heavy-duty hit for us,” said Hinton. “That’s why so many people got laid off.”
SDC has a $30.5 million operating budget. Its weatherization budget is $6.7 million, up from $6.2 million in 2022.
Meanwhile, the agency’s leaders said they were still trying to figure how the funds got misplaced and what impact, if any, the financial goof will have on the future of Hinton and the agency. Hinton’s pay package increased by 17% from 2018 to 2022, going from $187,259 in 2018 to $218,532 in 2022, according to the agency’s filings with the IRS.
SDC provided few details about the misallocation and has declined to say how much money it owes to individual contractors and vendors.
The error was made by one individual in the SDC finance department, Hinton said. The individual wasn’t laid off, and Hinton declined to name the person — stating it’s a “personnel issue.”
“I’m not skilled enough to look into the deep details of our accounting,” Hinton said, noting the agency would be conducting an internal review.
SDC faces forensic audit
Word of SDC’s financial troubles began trickling out late last year during a financial review by the state Division of Energy Housing and Community Resources, officials said.
Division staff discovered SDC’s late payments and overdue bills to contractors in November. Nearly four months later, the state suspended the weatherization program to conduct an audit. The state doesn’t know how much SDC misallocated or when the problem began.
“DOA has already taken steps to notify all [SDC] customers… and is undertaking a forensic audit of SDC operations related to weatherization and other state and federal grant dollars,” state Department of Administration spokesperson Tatyana Warrick said in an email.
Forensic accounting combines investigative and accounting techniques to identify potential fraud or financial irregularities, according to Barron’s Dictionary of Finance and Investment Terms.
It was clear by the end of last year that SDC was in hot water. The agency unsuccessfully sought a $1.5 million loan from a lender in December 2023 to help it stay afloat, Hinton said.
Hinton said SDC was “attempting to close the problem.”
He declined to say why the deal fell through or who the potential lender was. He described the potential lender as “someone who usually works with not-for-profit agencies.”
The SDC didn’t respond to the Journal Sentinel’s March 25 records request for all memos and emails related to the misallocation of funds. Initially, it also declined to share the names of contractors who worked for its weatherization program. The agency is covered by the state Open Records Law, which requires responses “as soon as practicable and without delay.”
CEO offers no explanation about how funds were misallocated
Hinton repeatedly said he didn’t know details about how the money was misplaced.
Hinton, who has been at SDC’s helm since 2013, says he became aware that the taxpayer funds were being used inappropriately during the financial review with the state.
Hinton is “pretty confident” that the state money wasn’t stolen but instead used in other SDC programs, which violates the conditions of SDC’s grant with the state, he said.
“It is not something that I think is at the level of someone going to jail for,” Hinton said. “It’s something that somebody did, and they shouldn’t have done. It’s as simple as that.”
In an interview on March 27, Hinton said the agency is planning an internal investigation to determine what went wrong.
The SDC has endured a handful of controversies regarding its management since at least 2012. That year, SDC lost its two biggest programs, Head Start and Wisconsin Works. A 2013 audit of the SDC’s payroll system found “inappropriate payments,” according to the Journal Sentinel.
For the past seven years, however, SDC has had clean audits from outside sources, said SDC spokesperson Chantell Sain. The SDC currently has about 20 programs, she said.
Contractors unpaid after SDC suspends weatherization program
Lopez’s company worked with state-funded agencies for several years without a hitch. So, she trusted SDC and was shocked when problems surfaced.
In February, the state called Lopez to quiz her about how her experience working with SDC had been going. Lopez said she told the state everything was going well, and she was paid on a regular basis.
“But I was not aware of everything,” Lopez said.
She didn’t discover the SDC owed her nearly $100,000 until she read Hinton’s March 15 letter announcing the suspension of the weatherization program, she said.
Since then, Lopez said she has been met by silence from the state and the SDC. She’s emailed and called them but has received no responses or updates on payment, Lopez said.
A major goal for the state’s forensic audit of SDC is to shed light on how many contractors are affected and how much they are owed money, Warrick said.
SDC hopes an internal investigation will help answer all their questions about the misallocation. Hinton believes that the state will be paying the unpaid contractors, not SDC.
“One of the things our board wants to do is an investigation and a deeper dive and see just what was done and how much was done,” Hinton said.
SDC employees transfer weatherization work to other agencies
Hints that financial tightening and layoffs were coming began appearing at least a couple weeks before 28 workers were laid off on March 21.
Many of the SDC weatherization employees spent their last two weeks on the job transferring their work to La Casa De Esperanza and the Partners for Community Development, which also provide weatherization services, SDC said.
Partners for Community Development started receiving referrals from SDC customers in the Milwaukee area on March 11, said Gacoby Jones, the agency’s weatherization manager.
Jones said he’s received at least 15 customers. His agency is waiting for state approval and funding in order to serve the SDC customers, Jones said.
La Casa De Esperanza officials didn’t return calls from the Journal Sentinel.
SDC’s layoffs included about a half dozen managers, six energy auditors, an accounts payable employee and a financial coach, according to the agency.
SDC tax assistance, food pantry programs cut back
The suspension of the weatherization program is one of several recent SDC cost-cutting moves.
SDC’s Volunteer Income Tax Assistance program stopped accepting clients shortly before income taxes came due because it had “reached capacity,” said SDC’s attorney William Sulton.
Sulton said the food pantry is open but “reduced in size due to a decrease in demand.” However, the SDC website says it is “closed until further notice.”
Both closures were not connected to SDC’s financial troubles, said Elmer Moore Jr., SDC board chair.
In March, SDC announced on Facebook its 2024 Youth Empowerment Summit was also canceled because Moore said it didn’t feel right to have a celebration on the heels of a large layoff.
And in April, SDC’s Milwaukee Emergency Rental Assistance program closed due government funding drying up, an SDC press release said. The program distributed more than $90 million to over 10,000 families.
Meanwhile, in Racine, Lopez is keeping her fingers crossed and trying stay positive that she will collect the money owed to her by SDC.
“We have hope … that everything is going to go back to normal,” Lopez said.
Gina Lee Castro can be reached at gcastro@gannett.com. Cary Spivak can be reached at 414-550-0070 or cspivak@jrn.com.
This article originally appeared on Milwaukee Journal Sentinel: Anti-poverty group SDC on ‘shaky’ financial ground, faces state audit
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