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Don Cumberland, local resident who was hired at the Washington Needle Depot in 2005, is photographed outside his work in the DTES in Vancouver, British Columbia, Sunday, March 23, 2014. Soon after being hired he was promoted to Peer Supervisor, a position he still holds today. (Rafal Gerszak for The Globe and Mail)

Don Cumberland, local resident who was hired at the Washington Needle Depot in 2005, is photographed outside his work in the DTES in Vancouver, British Columbia, Sunday, March 23, 2014. Soon after being hired he was promoted to Peer Supervisor, a position he still holds today.

(Rafal Gerszak for The Globe and Mail)

Business, real-estate ventures – not fraud – caused deficit at PHS Add to ...

Inventive but money-losing social enterprises plus complicated real-estate ventures drove PHS Community Services into a deficit that prompted the province to scrutinize its books, the B.C. Housing Minister says.

And while Rich Coleman says the province will likely hang onto the useful properties on which the Portland Hotel Society has mortgages, it is not prepared to keep pouring money into the social enterprises, which included a laundry service, a janitorial service, a beekeeping operation, a chocolate-making shop, and a café.

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“We’re not going to subsidize all this stuff,” Mr. Coleman said. “The deficit was caused by these social enterprises.”

PHS set up many of the businesses to provide employment for residents of the 1,000 units of housing it manages in the Downtown Eastside, many of whom have addictions and mental-health problems.

PHS director Mark Townsend always said the ventures lost money, but his organization thought it was important to provide residents with meaningful but flexible work.

But Mr. Coleman said that was wrong.

“You can’t be robbing from the services they were paid to provide. Any cross-subsidization would be contrary to the operating agreement,” he said.

A new board, headed by former Vancouver Foundation CEO Faye Wightman, and operations managers brought in by BC Housing and Vancouver Coastal Health – the two main sources of financing for PHS – will make the decisions about all of the operations, Mr. Coleman said.

“They’re going to run this thing for some time. We’re not going to allow this to morph back to what it was.”

Mr. Coleman said PHS seemed to be doing well up to the 2010-2011 fiscal year. In spite of a special audit done in 2002, when the society’s bookkeeper died in the middle of the year and the books became a mess, he said there was no sign of problems after that.

But when deficits started creeping up, the province took a longer look.

It discovered the society, and especially four managers, were spending some of the money designated as an administration fee – about $2.5-million a year or nine per cent of its budget – on things that raised questions with the auditors, such as vacations for staff, trips by managers to international drug-policy conferences with stays at high-end hotels in London, New York, Vienna and elsewhere, restaurant meals and limousines.

But those expenses did not appear to be driving the deficit, Mr. Coleman said.

The financial statement that PHS’s auditors, EPR in Coquitlam, prepared for the March 31 year-end in 2013 was changed after a first filing showed an operational deficit of $2-million.

A complex real-estate transaction made that into an apparent surplus of $4-million after the statement was revised.

Essentially, the society exercised a 10-year-old option to buy the New Stanley building on Cordova, currently a shelter, for about $2-million from the City of Vancouver.

Mr. Townsend said the city demanded PHS exercise its option just before the March 31 deadline, which had the society scrambling. In the end, it got the $2-million from developer Ian Gillespie, with whom PHS had plans to develop the New Stanley and another property it had acquired, the site of the historic Only Café. Since the New Stanley property was actually worth $9.5-million on paper, that made it appear that the society had gained money – thereby converting a deficit to a surplus.

But the society was incurring debt from holding onto the Only Café site, because the city had suspended all development applications in the area while it worked on an overall plan for the Downtown Eastside.

Mr. Coleman said no one is suggesting police should investigate anyone at PHS. “We have not come to any conclusion there was fraud. There was bad spending, irresponsible spending, but it isn’t criminal to be stupid.”

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