Deep in Debt, Hermandad Struggles to Ensure Future

By JANET WILSON

March 31, 1997 12 AM PT

TIMES STAFF WRITER

LOS ANGELES — The lights are on at Hermandad Mexicana Nacional’s sparkling new health clinic, but so far, the 20 examination rooms are empty. In fact, the prominent immigrant rights group is $4.2 million in debt on the project and is still negotiating a contract for doctors, nurses and medical services so it can open its doors.

The clinic, badly needed in its neighborhood of hard-working poor just south of downtown Los Angeles, illustrates the strengths and weaknesses of the 50-year-old nonprofit organization that is at the center of a voter fraud investigation.

While long on vision and compassion, the organization, known for efforts to help immigrants become citizens and learn English, often comes up short in tending to details like paying bills, salaries and taxes.

To Bert Corona, Hermandad’s founder and executive director, the new clinic is key to its fiscal future and proof that it is “bigger than ever.”

To others, the clinic is a highly risky venture by a nonprofit already awash in debt. Despite receiving $35 million in public grants in the last 10 years, Hermandad today has little cash on hand and is saddled with huge long-term mortgages and loans.

An Orange County district attorney’s investigation of Hermandad’s Santa Ana operation and how it registered voters is now in its fifth month. The California secretary of state announced two weeks ago that 721 people who were not citizens appear to have registered through Hermandad, and that 442 of them had voted illegally.

Long before the investigation began, however, the nonprofit was immersed in financial woes. Documents obtained by The Times and dozens of interviews show that:

* Hermandad is $8 million in debt, according to its last tax filing, due mostly to the cost of the Los Angeles health clinic. Corona said Hermandad is suffering cash flow and long-term debt problems because government agencies refuse to pay nonprofit organizations for services in advance, forcing them to wait too long for reimbursement. Experts agree that nonprofits have a hard time receiving public funds in a timely fashion. They also note that hundreds of other California nonprofits that operate under the same constraints are fiscally sound.

* Hermandad was evicted from its North Hollywood office in 1995, and a lawsuit by its former landlord against the group for $400,000 in back rent is still pending. Hermandad is counter-suing.

* Hermandad owes $165,000 in back employee taxes, according to its own bookkeeper. Former employees say that they waited months to be paid, and that students in Hermandad classes have had to bring their own supplies. Corona said the IRS will get its money a little at a time. He acknowledged that employees often were not paid on time and that there were scant supplies--a reality of the nonprofit world.

* Hermandad will not receive a $2.1-million federal grant for citizenship and English classes, which amounts to 80% of its 1996-97 budget. Corona said he intends to get the money, even if it means flying to Washington to meet with Department of Health and Human Services officials.

“There are major problems, no one can deny that,” said Antonio Montano, Hermandad’s bookkeeper for the North Hollywood and Los Angeles offices. Montano said the loss of the $2.1-million grant could be devastating. “I’m going to be very truthful with you. . . . You could say that money is life or death to us.”

Hermandad officials say their ability to survive could affect thousands of immigrants.

In Los Angeles and Orange counties alone, 134,000 legal immigrants--mostly elderly and disabled--have been told they will lose Social Security benefits within months if they don’t become citizens. Statewide, Hermandad was the second largest publicly funded provider of citizenship classes and testing in 1996, education officials said. But Gabriel Cortina, the deputy secretary of education who decided that Hermandad would not receive the $2.1-million grant, noted that more than 400 other organizations provide similar services.

At the request of The Times, Irvine certified public accountant Ed Benoe and San Francisco tax attorney Rosemary Fei, both of whom specialize in analyzing tax-exempt organizations, examined Hermandad’s available tax forms.

The nonprofit operates under two corporate names--Hermandad Mexicana Nacional Legal Center and Hermandad Mexicana Nacional--and the boards of directors of the organizations are nearly identical. Hermandad Mexicana Nacional is largely a membership organization. According to its tax forms, it takes in and spends far less than the Legal Center, which conducts the bulk of grant writing and other fund-raising efforts.

Benoe said the Legal Center had gone from being a “very, very solid organization at the end of 1990,” when it took in $10 million in federal grants, to a “highly leveraged” organization with $8 million in mortgages and a $450,000 operating deficit on June 30, 1995, the last year for which required tax forms were filed.

“In point of fact, you’ve got an insolvent organization here,” Benoe said. “Their funding seems to have gone away. . . . They’re financially distressed, over the long term, really.”

Fei, who examined Hermandad’s returns independent of Benoe, said, “The organization is running substantial deficits, and they seem to be getting worse.”

While it is a tough financial period, however, it is one that “an organization could pull out of,” Fei said.

“It’s so hard honestly to predict,” she said. “To run a social services agency can be an incredibly satisfying thing, and also an incredibly heart-breaking thing, because of the unstable funding.”

Both Benoe and Fei said $5.3 million worth of property purchases made in 1994--mostly for the health clinic--had substantially increased the amount of Hermandad’s debt. Fei said that while the mortgages could prove “fatal” to Hermandad, starting the medical clinic might be just the sort of new programming that it needs to bring in more cash and stay afloat.

“When things get bad, people have very tough decisions that they have to make,” Fei said. “It may take some creative moves.”

Corona said projections for the clinic show it should be able to bring in 5,000 clients a year and $500,000 in annual revenues for Hermandad’s bills and operations. A 1991 study commissioned by Hermandad for state health officials projected 10,000 visits per year by medical and dental patients from 1994, when the clinic was originally slated to open.

The study also identified a need for outpatient health care in the south Los Angeles neighborhood where the clinic is located, especially for Latino immigrants. Corona and an attorney for Tower Health, a Long Beach health maintenance organization, say they are negotiating a contract that could open the clinic by May 1.

However, the study, designed to show that Hermandad could handle the large start-up costs of such a project, also predicted that the nonprofit would have $12.5 million in revenue in 1995, when in fact revenue was only $2.6 million in 1994-95.

Still, Corona, who carries a running tally of Hermandad’s finances in his head, is optimistic.

“All we need is a year, and we will be OK,” he said.

Hermandad Mexicana Nacional, or National Mexican Brotherhood, has already lasted 50 years. Formed by Mexican day laborers in the U.S. after World War II, it incorporated near the Mexico-California border in 1976.

It is the Legal Center, however, incorporated in 1985, that has received and spent the lion’s share of public funds. Within two years of forming, the Legal Center went from a tiny Santa Ana storefront with $1,657 in its bank account to a major immigrant services provider in North Hollywood, Santa Ana and Los Angeles.

The Legal Center was formed to spearhead a series of successful rent strikes by Santa Ana and Garden Grove tenants against substandard living conditions. Hermandad lawyers represented the tenants in court and held their rents in escrow. Today, Hermandad makes referrals to lawyers but has no staff attorneys.

The boom years were 1988 through 1991, after the national Immigration Reform and Control Act was enacted to provide amnesty for longtime illegal residents. Hermandad Legal Center received $23.5 million from one grant alone.

Former employees recall immigrants lined up outside the offices each morning, weekends included, to learn how to become citizens. The nonprofit reported in a grant application that it had helped 100,000 people become citizens during those four years.

Maria Contreras, a former controller for the nonprofit who left in February 1996 for another job, said that when she started in 1992, hundreds of people were employed, and weekly payrolls topped $100,000.

At the end of 1992, however, federal amnesty funds expired, costing Hermandad its largest source of income.

Just six months later, in mid-1993, Hermandad’s expenses had outstripped its income for the first time. Government grants plunged from $8.4 million the year before to $3.7 million. Total revenue fell from $9.2 million to $4.8 million.

The Legal Center borrowed $341,000 from Hermandad Mexicana Nacional to cover the gap. Hermandad officials also began searching for grant money “wherever they could get it,” Contreras said.

“Many experts, auditors and others told us we should apply for Chapter 11 [bankruptcy protection], forget about everything. We refused to do it,” Corona said. “There is too great a need for what we do.”

A variety of grants, combined with membership dues, class fees and private contributions, have kept Hermandad running from 1993 through the present, according to staff.

But ambitious building acquisition programs in 1994 added debt: $4.6 million for its North Hollywood office building and for the medical clinic, to be paid back at $27,870 a month; and $1.7 million for its downtown Santa Ana headquarters, at $15,000 a month. After assuming the large mortgages, Hermandad Legal Center struggled to pay $10,000 monthly rent on its main offices on Case Avenue, also in North Hollywood.

“Many times people told Mr. Corona we should move, that the rent was too high, but he said, ‘No, this is in the heart of the community,’ ” Contreras said.

Even though Hermandad worked hard to obtain more grants--the 1994 Northridge earthquake alone netted $1.3 million in counseling funds for Hermandad’s Los Angeles and North Hollywood offices--it still didn’t cover the bills. The nonprofit was evicted by sheriff’s deputies from the Case Avenue offices in May 1995 for failing to pay 14 months worth of back rent, said Kurt Kananen, attorney for building owner Stella Deluca.

Kananen said Deluca sued Hermandad in mid-1995 for nonpayment of rent, then worked out a settlement that included a payment plan. Hermandad allegedly breached the agreement, so Deluca sued again in 1996 in an action that is still pending, he said. Kananen said that Hermandad owes Deluca about $400,000.

Corona said Hermandad had filed a counter-suit because its business had been hurt after the eviction and because Deluca refused to make necessary repairs and unfairly kept a $76,000 deposit.

These days, Corona spends little time at the North Hollywood office. His main focus is the Los Angeles building, watching renovations for the health clinic.

The planned opening has been put off twice, and Hermandad is behind by 13 payments over the last several years to the bank trustee handling loan repayments for the clinic, according to a state health official.

State officials have asked Corona to consider leasing out the facility and to bring in consultants. Because the state insured the loan, it could foreclose on the new clinic property, force Hermandad to change its board of directors, order in outside consultants or seize other assets.

Corona said he doubted the state would resort to such measures.

“The state is not that brutal,” he said. “The state is interested in providing health services to people who need them. That is the whole point.”

Corona has forestalled creditors by telling them he plans to make payments to them as soon as Hermandad receives the $2.1 million it is due for English and citizenship classes. Education officials, however, say they have no intention of sending the money.

Still, Corona presses forward. He has vowed to go to Washington to press federal officials to overturn the state’s decision.

“Hermandad will continue no matter what,” Corona said, “We will go to the White House if we have to.”

Also contributing to this report were Times staff writers H.G. Reza and Dexter Filkins.