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Mark Townsend of the Portland Hotel Society in shown in front of the boarded-up Pennsylvania Hotel on Hastings Street in Vancouver, August 9, 2006.Rafal Gerszak/The Globe and Mail

The leaders of the unconventional non-profit society that fought for the country's first supervised-injection site and ran a complex empire of housing and health services in the Downtown Eastside have bowed to provincial pressure to step aside from their organization.

Mark Townsend and his wife, Liz Evans, along with two other senior managers and the board of the PHS Community Services Society, say they've agreed to leave by the end of the month and let provincial managers take over.

Their intent, they say, is to preserve services to the society's 1,000 residents and hundreds of other clients, most of whom have lived with bouts of homelessness, drug addiction or mental illness.

The departure of Mr. Townsend and Ms. Evans, along with senior managers Dan Small and Kerstin Stuerzbecher, is sure to set off a firestorm both in the fractious Downtown Eastside and the international world of drug policy and harm reduction.

The province, which had $17-million in contracts with PHS last year through Vancouver Coastal Health and BC Housing, was demanding PHS leaders resign or lose their contracts after a financial review and an audit last year raised concerns about the way the society spends its administration fees.

Provincial representatives pointed to the money PHS spent on sending people to national and international conferences about drug policy and harm reduction, which sometimes included $700-a-night hotel rooms.

They also raised questions about the perks the society gave to staff, such as paid vacations to Disneyland or Europe, and its payment for use of the basement in Mr. Townsend's and Ms. Evan's Strathcona house near the Downtown Eastside as the organization's main office.

PHS took the federal government to court over the injection site, resulting in a precedent-setting, 2011 ruling by the Supreme Court of Canada that allowed it to stay open.

The group has routinely attracted international attention. British comedian Russell Brand visited PHS operations recently and tweeted enthusiastically about them.

The province's move against PHS has already prompted fears that the government takeover will scare other non-profits away from speaking out publicly for causes or deviating in any way from sanctioned methods of delivering service.

Mr. Townsend said he believes the issue is not due to any problems with their organization's finances, as Housing Minister Rich Coleman has been alleging during the past two weeks, but says the leadership team has decided to leave because they realize the province has simply lost faith in them.

"We're left with no choice because I don't want to hurt people. We don't want anyone to burn down the village," said Mr. Townsend, who founded PHS with his wife, Ms. Evans, a psychiatric nurse, in 1993.

Mr. Townsend said he and other senior managers are going to co-operate fully with the province to ensure there's a smooth transition and that neither staff nor residents are affected by the changeover. "We're going to work earnestly and wholeheartedly with them," said Mr. Townsend, who informed the organization's 300 staff Saturday about the impending change.

Mr. Townsend said auditors praised the organization for its effective work with a challenging population. "One hundred per cent of the program money goes to programs," he said.

He said PHS combined administration fees (9.1 per cent of its budget, as laid out in government contracts) it received from other private sources to pay for things such as vacation trips for staff, in lieu of overtime or other benefits, and to cover lobbying efforts for their programs.

"We did send [one of our managers] away," said Mr. Townsend, when asked about a boat trip in Germany. "She had been subjected to like torture from [all the audits being done on PHS]. We used money from a social enterprise, the clothing store."

PHS, via its lawyer from the powerhouse firm of Farris Vaughan, argued in negotiations last week with the province about the organization's future that the real issue didn't seem to be money.

"The auditors' issues with PHS's financial controls are all able to be corrected, given good faith and the will to do so on all sides. PHS has been effectively delivering the services, it is not insolvent, and there is no suggestion whatsoever of any dishonesty or misappropriation of funds," said the letter from lawyer David Gruber.

"The financial controls do not merit BC Housing and Coastal Health's apparent loss of faith in PHS. However, PHS accepts that such a loss of faith has nevertheless occurred."

Since it appeared the province's real concern was the society's governance, Mr. Townsend said, he and the board offered to step aside rather than risk having service to PHS residents terminated or engaging in a long-drawn-out legal battle.

The letter from Mr. Gruber warned that it's problematic for government to take over a non-profit, given that it's the members who are supposed to choose the board, according to the rules of the Society Act.

However, the province has indicated it will handle those legal issues as they arise.

People have already lined up quietly on one side or the other of the public rupture between PHS and its government funders, which has been playing out in the media and elsewhere the last two weeks.

Allies have said behind the scenes they think the province is retaliating against PHS because its programs were too radical and because Mr. Townsend fought too aggressively to save them. Critics have said PHS was out of control, spending its money in mysterious ways, and that Mr. Townsend's behaviour sometimes crossed the line.

The non-profit's most ardent fans say government will simply be unable to maintain the kind of operation PHS had.

"PHS has thrived, in a very large and unique way, through the hands on culture of leadership that is motivated, hands-on and inspiring," said one former employee.

"And although I have no idea what the new management will look like you simply could not parachute in people with the ability to navigate, cultivate and propagate the culture of PHS."

PHS, which started out running rooms in one small hotel on Hastings Street, now manages housing for almost 1,000 people in more than a dozen sites. It also runs a credit union, a chocolate-making social enterprise, the injection site, a crack-pipe-vending machine, and a health clinic, among many other things.

According to its filing to the Canada Revenue Agency in the last fiscal year, which it's required to do because of its charitable status, PHS declared revenues of $34.6-million, with about $20-million coming from various levels of government. It had $58-million worth of land and buildings, but $53-million of liabilities.

PHS does not appear, according to public records, to have outstanding debts or creditors at its doors. There is only one lawsuit on file again PHS over money, from a waste-disposal company claiming $12,000 in damages after its contract was cancelled last year.

Mr. Townsend said the organization is carrying debt because it has bought some real estate that it planned to develop as social housing. As well, the organization spent close to a million dollars over the last decade to move hundreds of people squatting in the then-empty Woodward's department store, moving them several times to different hotels and shelters without subsidy.

But PHS could find itself in financial straits in short order if the province decided to cancel contracts that can be terminated with only three months' notice.

Vancouver Coastal Health contracts, worth $8.5-million, can be cancelled with no notice, according to a provision of its contracts with PHS.

VCH president David Ostrow referred to that provision when he wrote a letter to PHS leaders about 18 months ago when he threatened to terminate the agency's contracts with PHS.

He was upset that PHS staff and residents in their housing were holding regular protests outside and inside the health authority's offices to demand funding for a women's program at the Rainier Hotel.

He said those protests were causing extreme distress among his own staff and damaging PHS's credibility.