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Nonprofit company makes its owners wealthy

While the state cuts services for the disabled, the owners of a company that provides vocational help for them have made more than $7 million in five years.

November 02, 2009|Alan Zarembo

Edward Dawson started his business from scratch in 1978. He and his wife, Marcia, built it into a $63-million-a-year enterprise with offices throughout California.

The couple, who earned more than $7 million in salary and deferred compensation in the last five years, now own a villa overlooking the beach in Palos Verdes and other real estate worth millions of dollars.

Theirs is a classic tale of entrepreneurial success -- except their wealth comes from running a nonprofit that is sustained by taxpayer dollars.

The company, Social Vocational Services, provides job training, life skills instruction and group housing for people with developmental disabilities -- an industry that relies on low-wage workers and government handouts.

For The Record
Los Angeles Times Tuesday, November 03, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 58 words Type of Material: Correction
Nonprofit's wealthy owners: An article in Monday's Section A about a nonprofit company, Social Vocational Services, run by a Palos Verdes couple included a garbled sentence that should have read, "In 1999, the Dawsons arranged to sell SVS to ResCare Inc., a for-profit company headquartered in Kentucky." (The garble said "not sure you kno" in place of "ResCare.")

The Dawsons made their millions while navigating the murky boundaries of nonprofit law. By definition, nonprofit companies exist for the public good. Federal law says that executive pay must be "reasonable" -- a vague standard that regulators and watchdogs say essentially allows nonprofits to set their own limits.

While the state is slashing the budget for the developmentally disabled, it places no ceiling on how much executives like the Dawsons can earn. In addition to their pay, they collect more than $700,000 a year for renting properties to SVS, including a San Francisco condominium for their own use.

Their financial practices were unusual enough to prompt an investigation by the state attorney general in 2000 into whether SVS' board of directors was placing the Dawsons' personal gain above the nonprofit's public mission.

But after the investigation ended in 2004 with a confidential settlement -- obtained last month by The Times through the Public Records Act -- the board gave them raises. Over the next four years, Edward Dawson's salary as chief executive jumped from $368,508 to $872,311.

Determining what constitutes "reasonable" compensation under the law can come down to a debate among experts.

"These cases are often challenging to prosecute because there is no bright line for what constitutes reasonable compensation," said Belinda Johns, head of the charitable trusts section of the California attorney general's office.

Pushing for stricter rules on nonprofit executive pay, Sen. Charles E. Grassley (R-Iowa) recently told the Senate Finance Committee that boards have "rubber-stamped compensation packages which they know to be unreasonable."

Earlier, SVS was among five nonprofits nationwide singled out in a 2005 report on employment programs for the disabled by the U.S. Senate's Commission on Health, Education, Labor and Pensions.

The commission found their executives benefited from excessive compensation, lavish perks or self-dealing -- conducting business with one's own company.

But the law is also open to interpretation on self-dealing. It's allowed if the board considers other options and finds them less beneficial to the company.

"If you have good lawyering and you are very brazen, you can work around things," said Jim Fishman, a law professor at Pace University in New York.

Frances Hill, a law professor at the University of Miami who reviewed the 2004 settlement for The Times, called the agreement "insufficient" because it left the Dawsons too much room to keep enriching themselves.

The Dawsons did not return calls seeking comment and refused to see a reporter who visited their headquarters in Torrance. SVS board members could not be reached.

A lawyer for SVS, Savery Nash, said the Dawsons believe they should be compensated as if they worked in the private sector, an idea now embraced by many nonprofits, notably hospitals and arts organizations.

Nash also defended the rental arrangements and other side deals, saying that Edward Dawson has always provided the nonprofit a bargain and is entitled to a return on his investments.

"All along he has been sticking his neck out for the company," Nash said.

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Edward Dawson was a 31-year-old graduate student at UCLA when he found a way to combine his interests in developmental disabilities and real estate. SVS began as a series of group homes.

By the time he got his doctorate in education in 1982, his company was adding programs for clients and vans to transport them.

Most of the money came from the state -- and still does.

Under the Lanterman Act of 1969, people with mental retardation and other developmental disabilities are guaranteed a wide range of state-funded services. Money flows through a network of 21 regional centers, themselves nonprofits, which then contract with providers, including SVS.

Marcia Dawson, who has a mentally retarded son, was a caseworker at Harbor Regional Center in Torrance before she met her husband. They married in 1984. As the nonprofit grew, the Dawsons bought more homes, then leased them to SVS.

By the end of the 1990s, SVS had grown into a $32-million-a-year business.

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