Nine new and rehabbed houses developed by Germantown Settlement, a venerable city nonprofit, were sold at sheriff sale for $250,000 in October 2009.

The price was quite a deal, given that more than $1.5 million in taxpayer and charitable funds had been spent on the project.

That deal might pale compared with losses taxpayers could yet see on investments with the now-bankrupt organization.

By its own account, the 126-year-old social-service agency and its subsidiaries are more than $38 million in debt, including loans from the U.S. Department of Housing and Urban Development (HUD), the Pennsylvania Housing Finance Agency, the Philadelphia Redevelopment Authority (RDA), and the Philadelphia Industrial Development Corp. (PIDC). That figure includes more than $16 million in debts listed in bankruptcy filings by Settlement and one of its key subsidiaries.

Once hailed as a model community-development corporation, Germantown Settlement now holds a portfolio of largely bankrupt or collapsing projects. The Germantown neighborhood is pockmarked with Settlement's shortcomings, including a shuttered charter school, boarded-up housing, and empty or poorly used retail space.

Settlement filed for bankruptcy in April along with two of its subsidiaries, Greater Germantown Housing Development Corp. and Greater Germantown Education Corp. Last week, Settlement withdrew its reorganization plan in the face of creditor opposition. A plan has yet to be submitted.

An examination of its finances shows that Settlement built an extensive real estate collection largely with public dollars - as much as $100 million over the last 30 years - while repeatedly failing to cover its day-to-day financial obligations.

When unpaid taxes, delinquent loans, and other financial failings threatened further government assistance, Settlement refinanced its holdings to cover its short-term bills. The result: Taxpayer funds kept coming as Settlement's debt ballooned.

Settlement was repeatedly sanctioned by the city's Office of Housing and Community Development for failing to provide audits. The agency routinely received about $1 million a year from another arm of the city, the Department of Health. That funding ended last year.

PIDC loaned Settlement $1.8 million, even though it was already delinquent on a $34,000 PIDC loan. And in 2006, when the RDA loaned Settlement $1.3 million to purchase the Germantown YWCA, the nonprofit group had been running staggering cash shortfalls for years.

The RDA loan came at the urging of City Councilwoman Donna Reed Miller, a former Settlement board member.

"I had no knowledge of their financial situation then," Miller said in an interview. "I just knew it used to be one of the city's best social-service agencies."

Emanuel V. Freeman, Settlement's president, said his organization's current troubles were not the result of financial miscalculations, but rather an overly optimistic view of how much good Settlement would do in Germantown.

"Many of our projects were predicated on the assumption that the income of people in the community would grow over time," he said. "In fact, the opposite happened. And the need for our services grew and grew. Operating costs increased, our reserves got depleted."

Ken Weinstein, a community developer in Germantown, has a much harsher point of view.

"In 20 years in economic development, this is the only time I've seen a group that was supposed to be serving a neighborhood wind up doing the opposite," he said. "I don't see any projects that are successful. I see buildings that are vacant, deteriorating, and in tremendous debt. Everyone who has provided them funding without proper safeguards is to blame."

Troubling audits

Germantown Settlement has had a long and storied history in Philadelphia. It was founded by Quakers in 1884 to aid newly arrived German immigrants.

Freeman joined in 1972 and became executive director in 1982. Under his leadership, Settlement grew to a behemoth, collecting millions in government grants and contracts a year. It spun off a community-development corporation and charter school. It built low-income housing, a shopping center, and an office complex.

What, then, explains Settlement's calamitous state? The answer, it seems, was hiding in plain sight. The arc of its decline can be drawn from its public audits.

In 2001, Settlement reported that its current liabilities exceeded its current assets by $538,876. By 2003, that imbalance was $2.5 million. It was $4.8 million the next year. In 2005, Settlement reported a $3.5 million shortfall.

Where the money went is unclear, in part because of the state of Settlement's bookkeeping. In a 2002 audit of Settlement and its subsidiaries, Zelenkofske Axelrod L.L.C. found a host of irregularities, including nonexistent loans, investments, and bank accounts. There was a failure to properly account for about $1.3 million in grant money.

In subsequent audits, the firm reported that money flowed among subsidiaries without being reconciled or recorded. Just as troublesome are audits conducted by HUD on two apartment complexes built by Settlement with federal financing.

In 2007, HUD audited Elders Place II, which was built with $4 million in federal funds. The audit questioned $605,000 in spending, including not being able to account for $405,955. A 2008 Elders Place audit could not account for an additional $300,000.

If Settlement was overspending its budget year after year, how then did it stay solvent? In large part by repeatedly refinancing its holdings to pay off as much short-term debt as possible.

The Burgess Center, at Wayne and Chelten Avenues, was originally financed in 1998 with $2.8 million from Sovereign Bank and $800,000 from the PIDC.

In 2004, the PIDC loaned Settlement an additional $1.8 million on the property. More than $400,000 went simply to settle debt, including back taxes. Three years later, Settlement received a $7 million loan on the property from Parke Bank, which has its headquarters in Washington Township, N.J. That loan is now delinquent.

A flow of money

The money kept flowing, officials say, largely because of Settlement's long history as a successful social-service agency. Its track record, they said, made it easier to overlook current financial problems.

"Helping out struggling community-development corporations is not unusual," said Kevin Hanna, who was secretary of housing under Mayor John F. Street. "The city is in the business of helping community-development corporations stay in business and fulfill their mission to their individual neighborhoods."

The same rationale was given to explain why PIDC loaned Settlement $1.8 million in 2004 when the nonprofit group was three years delinquent on a $34,000 debt to the agency.

Sam Rhoads, PIDC senior vice president, said it was not unusual for PIDC to gamble on a struggling nonprofit organization.

"We make loans to community-development groups that are trying to improve their areas," he said. "We make risky loans where the private sector won't, because we are optimists about the city."

Among Settlement's biggest advocates has been Councilwoman Miller, a member of the nonprofit group's board until her 1996 election to Council. She helped open doors for Settlement when it was seeking an RDA loan to buy the Germantown YWCA. She did so, she said, without ever taking a hard look at Settlement's finances.

"I knew they were a great service agency," she said. "I guess I was aware that there were some red flags, but I had no idea there were these kinds of problems."

Contact staff writer Christopher K. Hepp at 215-854-2208