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Unity House in financial funk

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Star-Advertiser / 2004

Unity House Inc., at 1701 Ala Wai Blvd., is experiencing financial problems with the plunge in the stock market.

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The Lotus at Diamond Head was bought by Unity House in 2009 using a $5.5 million loan.

Unity House has long been a financial pillar of support for Hawaii families affiliated with organized labor, providing beneficiaries with child care support, school scholarships, recreational activities and other assistance. But the plunge in real estate and stock markets over the few years has shaken the organization’s foundation and triggered dramatic cutbacks in charitable spending.

The nonprofit shelved two of its three biggest social welfare programs, child care and scholarships, along with some less costly services two years ago, and has no plans to restore spending in these areas this year.

One major program — a retiree center that provides dance, exercise and excursions for seniors — has been maintained along with a few other less costly services including legal aid. But the cutbacks represent a significant loss in the local social services field stressed by the Great Recession.

Unity House, which has more than 20,000 beneficiaries, cut total program spending from nearly $1.6 million in 2008 to $620,320 in 2009, according to tax returns. Information wasn’t available for 2010 because that tax return is still being prepared.

One of the biggest programs suspended was child care support, on which Unity House spent $287,463 in 2008 through contributions of $100 a month to help recipients pay for child care.

The other big suspension was higher-education scholarships. Unity House had delivered $2.5 million in scholarships over the past decade, or close to $250,000 a year on average through individual awards ranging from $200 to $3,000.

Other programs or services eliminated were a newsletter in 2009 and last year’s keiki Christmas party. Some staff positions also were cut in early 2009.

Though the retiree center continues operating, spending was cut from $211,392 in 2008 to $133,574 in 2009.

Jim Boersema, Unity House’s chairman, said the board of directors felt spending restraints were necessary to protect the organization’s long-term health following hits to its investment portfolio. "Two years ago we thought it was practical to cut back on some expensive things," he said. "When the economy is slow you need to cut back."

The cuts have been painful for beneficiaries, especially considering that aid has declined as needs have risen for those facing income losses through layoffs and other work reductions.

The board’s decision has drawn some criticism from former staff and labor leaders. "Our members weren’t happy with (the cuts)," said Eric Gill, financial secretary-treasurer for Hawaii’s largest union representing hotel and restaurant workers, Unite Here Local 5.

Gill is an old adversary of Unity House’s former leader Tony Rutledge, who battled Gill for leadership of Local 5. Under Gill, Local 5 sued Unity House in 2005 attacking management practices. Though Gill was appointed to the Unity House board in December as a result of the lawsuit’s recent settlement, he said he has little influence and remains critical of operations. "It’s got to be the worst-managed charity in the world," Gill said.

Rutledge, who was ousted from running Unity House in 2004, said such program cuts never had to be made during his tenure. "It’s been a shame," he said. "I feel bad (for members)."

Boersema is emphatic that Unity House leaders have done a prudent job amid extraordinary economic challenges.

To be sure, program cuts and investment losses aren’t unique to Unity House. Other nonprofits, including those that rely on returns from a financial corpus for funding like Unity House, as well as those that rely on other funding sources such as government or private contributions, have faced difficulties.

According to the Hawaii Alliance of Nonprofit Organizations, 70 percent of 151 Hawaii nonprofits recently surveyed reported making budget cuts in the last fiscal year. The cuts averaged $300,000 but ranged up to $4 million, and included reductions in staff and services.

Kelvin Taketa, president of the Hawaii Community Foundation, said some nonprofits will let endowments erode to sustain charitable giving, but most don’t because it’s not sustainable and puts the organization at risk. "A lot of private foundations and other organizations that have endowments have had to cut programs or grants," he said.

The structure and history of Unity House makes it hard to compare with other charitable organizations.

The late father of Tony Rutledge, Art Rutledge, who ran the local Teamsters and Local 5 units, set up Unity House in 1951 as a labor organization in part to consolidate member services for the unions but also to ensure member contributions invested largely in Waikiki real estate couldn’t be touched by national affiliates.

Income for Unity House in its early years came only from fees paid by members of the two unions, and little money was available to spend on beneficiaries.

But in 1989 the organization sold a hotel it had built, the Waikiki Marina Hotel (now known as the Doubletree Alana Waikiki), for $43 million. Proceeds were invested to fund beneficiary programs.

The money and new jobs to manage investments and programs touched off intense contention among labor leaders for control of Unity House, though the Rutledge family initially retained its tight rule. Tony Rutledge took over in 1990 from his father, who died in 1997.

Union member dues ceased, but many members still maintain a sense of Unity House ownership although the definition of beneficiaries has grown to include almost anyone who supports the labor movement in Hawaii.

The value of Unity House assets over the last two decades has fluctuated, sometimes severely.

Boersema said meltdowns in stock and real estate markets in recent years forced program suspensions. Among portfolio losses was an investment in the development of a Wai­pio industrial condominium complex, which failed after buyers dried up in the market collapse.

"It was a beautiful proj­ect," Boersema said. "It just had bad timing."

The net value of Unity House assets in 2007 was $27.8 million but plummeted to $14 million in 2008, according to tax records. Over the last two years, Unity House’s net asset value has improved, reaching $25.4 million as of Sept. 31, according to Boersema.

Still, some negative financial pressure has remained, including a default by Unity House on a $5.5 million loan it used to buy the Lotus at Diamond Head hotel in Waikiki.

Unity House bought the boutique hotel for $8.5 million in December 2009 and planned to convert its 51 rooms into condominiums for sale. Boersema said the condo conversion was envisioned to bolster Unity House finances, but the proj­ect got held up and the one-year loan matured before it could be paid off or refinanced.

Last month the lender, MK Pacific LLC, filed a foreclosure lawsuit to repossess the hotel. Boersema said Unity House has arranged to refinance the loan and keep the hotel, which he said is doing fine.

Boersema notes that one big drag on Unity House finances has been the cost to defend lawsuits brought by Local 5 and others.

In 2008, Unity House legal expenses totaled $744,373, according to tax records. In 2009, legal expenses were $637,473.

Some of the legal costs stem from a 2004 federal probe that involved the Internal Revenue Service seizing control of Unity House and prosecutors filing criminal charges alleging mismanagement against Tony Rutledge and his son, Aaron, in their management roles.

During the takeover, a court-appointed receiver stated that "speculative and unwise investing" combined with unrestrained spending contributed to the organization’s net worth falling from about $49 million in 2001 to $29 million in 2004.

Local 5 piggybacked on the federal indictment with its own lawsuit in 2005, alleging that millions of dollars of Unity House money was diverted by the Rutledges for personal benefit. This case was settled last year.

In the federal case, Tony and Aaron Rutledge agreed to a plea bargain in 2006, clearing them of all charges pertaining to Unity House but imposing a lifelong exile from the organization for Tony Rutledge. Shortly thereafter a federal appeals court ruled that the government takeover was improper. Unity House ultimately had to reimburse Tony Rutledge for his legal defense.

Despite the failed federal case, some hailed the temporary takeover as something that saved the organization and allowed it to become debt-free for the first time in many years. But now the organization is struggling to make another turnaround.

Meanwhile, some effects from the federal case still linger. Last month, Aaron Rutledge sued Unity House to recover $150,000 he expended defending himself in the federal case that among other things alleged he breached his fiduciary duties as Unity House executive vice president. Rutledge also is suing for $150,000 in damages and attorneys’ fees in his pending case.

Rutledge, who failed to reclaim a seat directing Unity House after the federal probe, is critical of the board, saying salaries have risen while investment mistakes were made and benefits were cut. "They’ve taken a company that’s been in existence since 1951, and they’ve shattered it in the last five years," he said.

Boersema said full-time officers took a small pay cut last year, and he believes Unity House will overcome its latest difficulties to one day restore programs.

"We’re surviving," he said.

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