A Giant Borrows its Way to Growth, and Risk

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When the multi-service giant KidsPeace hired C.T. O’Donnell as CEO in 1999, he stepped into the shoes of a long-serving, beloved leader – and inherited the organization’s $76 million debt.

It was the type of doomed-to-fail scenario that many executives might avoid, but O’Donnell was known for steering a program with a good name and a bad bottom line out of harm’s way.

By last year, O’Donnell had doubled the number of youth that KidsPeace serves, nearly tripled the number of centers it operates and made it one of the highest revenue-producing organizations in the youth field (bringing in $170 million last year). The nonprofit had shaved off $12 million of a debt that one peer in residential care said “would scare a Fortune 500 company.”

In the corporate world, O’Donnell would be looking at an eight-figure bonus. But his December resignation from KidsPeace was announced amid stories of broken bones, increased police presence and a scary reliance on physical restraints (2,900 in one year) at its flagship campus in Orefield, Pa.

The growth of KidsPeace and its recent troubles point a spotlight on its business strategy. Stories from former KidsPeace staff members and the observations of others in residential youth care suggest that the agency might have grown in a risky way by allowing its debt to affect its mission.

An ambitious business strategy – including rapidly expanding to new states, keeping facilities at maximum capacity and accepting more seriously troubled youth – all appear to have made the bottom line healthier for the nonprofit as it set out to pay down its debt, even while considering more borrowing.

Asked if debt has pressured Kids-Peace to make such decisions, Kids-Peace Vice President of Communications Mark Stubis flat-out says “No” by e-mail. “Our primary reason for creating new programs is to help more children in need.”

Plans for Growth

KidsPeace’s former CEO John Peter and his chief operating officer, Rich Biolsi, are universally praised by colleagues as executives who really “get it.”

“For those two people, the focus was the kids,” says Mike Hopkins, former vice president of programs.

In the name of those youth, Peter allowed the 125-year-old organization, founded as Wiley House, to accumulate debt that peaked at nearly $100 million, most of it in the form of bonds issued through the Lehigh County General Purpose Authority. Those funds paid for one the largest and highest-quality facilities in the nation, the gleaming Orchard Hills Campus in Orefield. The funds also allowed KidsPeace to look toward a bigger future.

“Part of their goal was [to have] a national agenda, and to do it in different ways” O’Donnell says of the organization’s ambitions to develop more programs in juvenile justice and foster care. “My goal is always to serve more kids.”

O’Donnell is hardly a born chief executive: “When I was young I thought I might go to the priesthood, but I discovered girls” he says. But 30 years as a CEO of human service agencies honed his skills. He ran Crittenton Youth Services in West Virginia for 13 years, then took over Florida Sheriffs Youth Ranches in 1993.

The latter widely respected organization had built a reputation for providing residential care to troubled youth before they got locked up. The ranches had posted losses for two straight years, but O’Donnell increased revenues, largely by increasing the number of referrals to the program from juvenile justice.

That kind of track record played well when O’Donnell interviewed for the KidsPeace post. “He really sold the board on being able to raise money,” says one former KidsPeace senior executive.

One Leg?

Father Val Peter knows a thing or two about expansion. For 20 years, he ran the Omaha, Neb.-based Boys Town, one of the few youth residential organizations larger than KidsPeace. Peter inherited a local organization with two sites and a hospital; when he retired, it was operating 19 sites in 14 states.

To expand responsibly in the youth field, he says, “you need three revenue streams for this work: fees for service, third-party payers and generous donors.” During his tenure at Boys Town, Peter says, funding remained pretty much evenly split among those three.

A stomach for tough times also helps. “Your CEO and board are either risk-takers or they’re not,” Peter says. “We thought of ourselves as prudent risk-takers.”

Compared with Peter’s three-legged budget approach, KidsPeace is wildly unbalanced. Contributions and gifts represented less than 1 percent of the organization’s total revenue from 2003 to 2005, the most recent years for which tax returns are available. Money from fees for service brought in 96 percent of the $358 million in reported revenue. Stubis of KidsPeace says the agency operates with “very little endowment.”

Without diverse funding sources, diversifying the primary source might suffice. In that regard, O’Donnell’s tenure was a success. KidsPeace expanded from 25 centers in 1999 to 65 centers in 10 states, providing a range of services for at-risk youth. That expansion included:

• Residential treatment and education centers for youth in need of behavioral services in Bowdon, Ga.

• Two juvenile justice centers in Minnesota, the Mesabi and Prairie Academies, totaling 111 beds.

• A 10-building, multi-discipline facility at an old Army depot in upstate New York, in Romulus.

KidsPeace also expanded its non-residential programs, especially foster care. It holds foster care contracts in New Jersey, New York, Virginia, North Carolina, Florida, Pennsylvania, Indiana and Washington, D.C.

KidsPeace now serves about twice as many youth (10,000) as when O’Donnell took over.

The Danger of Debt

The growth of the organization was unfathomable even to some of its executives, many of whom joined KidsPeace with long résumés in youth work.

“They were just about to crest the $100 million mark [in revenue] when I came on,” recalls Scott Finnell, former KidsPeace vice president and current CEO of Pressley Ridge, a multi-state residential agency based in Pittsburgh. “Three years later, they crested $150 million. I can’t imagine another period in their history or any other organization’s that included a three-year growth spurt like that.”

By this fall, the organization’s debt had been reduced to $64 million. Moody’s Investors Service, hired by KidsPeace to provide credit rating and risk analysis, upgraded the organization’s debt rating twice in two years, significantly improving its position to borrow money.

The upgrade, Moody’s stated in a September report, “reflects our belief that management’s continued efforts to diversify service and geographic offerings will provide greater operating stability to drive further improvement of balance sheet measures.”

One of its greatest challenges, Moody’s said, is its cash-to-debt ratio, which measures the liquidity of a business. KidsPeace’s ratio is 12.3 percent, which means the organization holds $12.30 of cash assets for every $100 it carries in debt.

With no other revenue streams significantly growing, and with high debt payments to make, the organization has been particularly vulnerable to any disruption of revenues from services. “It’s really hard to manage that kind of debt,” Finnell says. “Most organizations out there don’t have near the debt-to-revenue ratio” KidsPeace has.

As one executive in residential care explained, low liquidity can hinder a nonprofit’s ability to handle financial adversity.

“Let’s say I’m at 80 percent capacity, in a year with 40 percent staff turnover,” says Jeremy Kohomban, CEO of The Children’s Village in Dobbs Ferry, N.Y, which has four times as much cash available as debt owed. “The best move” is to “pull back and hold intakes, develop capacity before I take other kids.” But if you need to fill the beds to meet your budget, he says, “pulling back is not an option.”

O’Donnell says of the debt: “I never looked at it as a curse. … As long as we followed our mission, [I believed] that debt over time would take care of itself.”

A crucial part of that mission is keeping youth in its residential facilities safe. At KidsPeace’s two largest facilities, accounts of turmoil suggested that youth may have been at heightened risk because of KidsPeace’s pursuit of more clients.


The KidsPeace complex in the old Army depot in Romulus, N.Y., opened in 2000 to accommodate youth with a multitude of challenges. By 2004, the doors were closed.

Stubis of KidsPeace says the operation was shut down because lower-than-expected enrollment “simply did not allow for this complex kind of program to be viable.”

A former high-ranking employee says the opposite was true. That complex “ramped up pretty quickly,” the ex-staffer says, rising from 130 youths to 200 within a year.

The problem, in this person’s eyes, was hiring enough staff to run the place well. “They were trying to staff for 220 kids in a rural area. I used to laugh; we were an hour from everywhere.”

Three-quarters of the youths lived in one facility. One common problem: the disruption caused when youths pulled the fire alarms.

“We had several very scary incidents,” the former employee recalls. “The kids would pull an alarm, there would be fights outside. Staff were injured, kids were injured.”

The state contracted with the Rochester, N.Y.-based Hillside Family of Agencies to take over the complex with a significantly lower census.

The KidsPeace approach was “destined to fail,” the former employee says, because of the high number of kids and the low number and quality of staff.

In September, Moody’s credited KidsPeace for its “two years of improved operating performance following the divestiture of New York operations in 2004.”

More recent problems have turned up regarding the use of restraints at the Orefield campus, where youth are typically brought to KidsPeace after numerous and increasingly more restrictive placements have failed, Stubis says.

The facility had not had a recent history of tragic accidents, although two youths died in the early 1990s after being restrained by staff. But with police called to the campus more frequently in recent years, the state Department of Public Welfare (DPW) investigated activities at the campus and documented 2,900 restraint incidents between July of 2006 and July 2007.

Restraints can mean anything from a two- or three-person hold to “taking a teen by the wrist,” Stubis cautions. He says youth with severe problems prompted the majority of restraints: Historically, fewer than 10 percent of patients account for 41 percent of the restraints.

In that year, seven incidents resulted in the hospitalization of youths with broken bones.

“That’s a crisis proportion,” former Boys Town President Peter says of the restraints.

The rate of restraint use is probably “not a lot larger” than for other providers, argues KidsPeace Acting CEO Lorrie Henderson, “given the number of patient days each year [at Orefield] and the kids we serve.” The average daily census for its Pennsylvania residential programs was 456 last year.

Boys Town serves 1,200 to 1,500 youth per night at its residential centers. “If we had 20 restraints a year, that was a lot,” Peter says.

What’s more, KidsPeace used a face-down technique that many states are moving away from because of its danger to youth.

DPW placed its 13 licenses with Kids-Peace on provisional status, which barred the organization from admitting new youth to its Orefield centers, except for the hospital, in September. Washington, D.C., which sends youth with special education needs to Kids-Peace, pulled its kids out of Orefield.

As if to illustrate the risk of low liquidity, the temporary ban on admissions forced KidsPeace to let go 79 employees.

Coverage of the woes in Pennsylvania bared harsh feelings, as borne out in the pages of the local daily newspaper, The Morning Call. DPW officials hinted at poorly trained or incompetent staff. Letters from former employees blamed the leadership for understaffing buildings that housed volatile youths. A scathing piece from Morning Call columnist Paul Carpenter called KidsPeace a “troubled behemoth … built around a lust for money, combined with a talent for pulling the strings necessary to get more.”

Bouncing Back

KidsPeace is hardly on the brink of disaster. DPW has restored all of its Pennsylvania licenses after the company agreed to stop taking aggressively violent youth and to train its staff to perform standing or seated restraint techniques.

A measurement in November found that the rate of restraints used by staff was 52 percent lower than the rate for July. Stubis says program staff members attribute that to increased focus on de-escalation, additional training and the discharge of some aggressive youths.

Acting CEO Henderson, a candidate to succeed O’Donnell, has worked with O’Donnell before, having taken over for him at Florida Sheriffs Youth Ranches.

“I think we both have the ability to look at the longer view,” Henderson says. “The difference is that I come from more of the direct care, clinical side” of youth work. “And I think that’s what’s going to help us going forward.”

O’Donnell dismisses the notion that debt played a role in expansion. Henderson stops short of conceding the connection, but says he understands why some people have that perception.

“There’s no question we have more debt than organizations of our type,” Henderson says. “Ostensibly it might look like” debt pressures the programming, he says, “but it’s not totally the case.”

Henderson’s plan of action may say more than his words. He says the plan includes potential expansion of non-residential services, but for a reduction in capacity at Orefield.

Contact: KidsPeace (800) 854-3123, http://www.kidspeace.org.