Why did SDC fail? Takeaways from our investigation of Milwaukee’s anti-poverty agency

Roughly five months have passed since the Social Development Commission abruptly shut down and laid off its entire staff, creating gaps in essential services for low-income Milwaukee residents.

So what happened? The results of a state audit launched after its closing should fill in some details. Already clear, however, is that SDC’s past leaders significantly weakened internal financial controls with little outside scrutiny, an investigation by WPR and Wisconsin Watch found .

Here are some takeaways from our investigation.

What is SDC?

State, county and city officials established SDC as a public, anti-poverty commission for Milwaukee County.

The organization provided a range of services such as emergency furnace installation, tax support, career advancement, senior companionship and rent assistance.

Why did SDC pause its programs?

Pandemic relief grants more than doubled SDC’s budget in 2020.

But as those extra dollars dwindled, SDC’s executive leadership failed to scale back operations. Instead, the agency moved funds around — using grant dollars for one program to cover costs for another. That’s a “no-no,” Barbara Toles, SDC board chair, said.

By late 2023, the Wisconsin Department of Administration noticed SDC’s weatherization contractors weren’t getting paid on time. The agency terminated SDC’s $6.7 million weatherization contract in March and launched an audit.

That loss eliminated more than one-fifth of SDC’s proposed 2024 budget and prompted layoffs of one-third of the agency’s staff. The final blow — and further layoffs — came after former management told the SDC board that the agency couldn’t make payroll.

Does SDC have a history of issues?

Controversy has surrounded SDC since it opened in the 1960s.

Headlines from SDC’s first decades described leaders using grant dollars for lavish trips, moving SDC money into private accounts and keeping abysmal records that prevented auditors from investigating the agency.

SDC cemented its scandal-plagued reputation in the 1990s.

The Milwaukee Journal Sentinel reported at the time that SDC leadership lost key financial documents in a series of burglaries, spent $400,000 in grant dollars without approval on a suspended construction project and allowed 1 million pounds of food to rot in storage.

By 2011 complaints surfaced over SDC’s management of Milwaukee’s Wisconsin Works and Head Start programs. The organization within two years lost both contracts and nearly 70% of its budget.

Who’s in charge of SDC?

SDC was created by governments but functions outside of them. State, county and city statutes define the organization as an intergovernmental commission, with each government appointing board representatives. No government claims broader oversight authority.

Government officials told WPR and Wisconsin Watch they largely focused on how SDC executes contracts with their individual offices — rather than broader operations issues.

The inclusion of government representatives on the SDC board offered some opportunities for scrutinizing the organization, but the vast number of other organizations that appointed board members complicated accountability efforts.

Was SDC audited?

As a recipient of more than $750,000 in federal funding, SDC was required by the federal government to contract an independent auditor to conduct an external audit. The most recent audit examined 2022 and found no issues with SDC’s controls or financial reporting.

But year-in-review audits alone can’t guarantee an organization’s financial health, experts say.

Such audits can’t stop financial missteps in real time. Nor can one report catch every issue simmering at lower levels of an organization as large and complex as SDC, said Brian Mayhew, executive director of the Center for Financial Reporting and Control at the University of Wisconsin-Madison.

The Wisconsin Legislature and the county had power to order comprehensive audits of SDC’s operations. Neither has exercised that power in more than two decades.

Were there signs of trouble?

SDC leadership’s elimination of the internal audit staff in 2013 and audit committee in 2022 should have raised red flags to any independent monitors, experts say.

The board dissolved the audit committee because it never met, Toles said.

Weakened financial controls can make organizations more vulnerable to mismanagement or wrongdoing. Internal auditors serve a key governance role by offering objective views of an organization, said Mike Varney, the North American board chair of the Institute of Internal Auditors.

SDC additionally failed to update financial procedures or internal controls for more than 15 years, even after eliminating the role of internal auditor.

SDC’s grantors didn’t seem overly concerned. Its government funding increased after the changes.

“The absence of an internal audit director should not be conflated to suggest there is a total absence of internal controls in that organization,” Tatyana Warrick, a Wisconsin Department of Administration spokesperson, wrote in a statement to WPR and Wisconsin Watch.

What’s happened since SDC halted services?

Former vendors and employees are still trying to collect payment for past work.

Meanwhile, grantors at the state, county and city level said they already reallocated funding previously pledged to SDC. At least three agencies plan to decide on next year’s grant before the end of the year.

Reopening will only become harder the longer SDC’s programs remain paused.

Meredith Melland, a reporter with Milwaukee Neighborhood News Service and Report for America corps member, contributed reporting.

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Why did SDC fail? Takeaways from our investigation of Milwaukee’s anti-poverty agency is a post from Wisconsin Watch , a non-profit investigative news site covering Wisconsin since 2009. Please consider making a contribution to support our journalism.