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Wednesday, April 07, 2010

Just More School News

This time out of Lakewood. An older, small Bais Yaakov closes with debt that I really am having a hard time grasping. I simply don't know how you get to the point of owing half a million to the IRS (read: tax with holdings as this is a 501(c)3, likely the majority of which is social security and medicare) and over $1,000,000 in liabilities in such a small school:

"By the winter of 2008, Bais Yaakov Elementary had all but crumbled. In debt to the Internal Revenue Service for nearly half a million dollars and delinquent on its mortgage, the girls' school of about 65 students stood almost solely on the crutches of last-minute donations. " [Orignial article here].

I'm really not at all interested in all the "politics, lawsuits and backbiting." When you have an IRS debt load per student of $7700 (rounded) in a town where tuition is rumored to be only $4000 or $5000 per year, the numbers are simply too hard to comprehend. The article states there are over $1,000,000 in liabilities. That exceeds $15,000 per student (which must translate into some truly astronomical figure per family)! I simply can't comprehend these numbers.

So that is the school news since my last post. The principal apparently pleaded with the judge to keep the school open as the kids supposedly will not be accepted elsewhere, are from poverty-stricken and "underprivileged" homes and will be "in the streets." Good thing the school is in bankruptcy court. Advertising potential truancy doesn't seem very wise in my opinion, but I digress.

Some hope the school will be purchased by someone with "deep pockets" so it can reopen. I hope that if this mythical figure with deep pockets swoops in to save the yeshiva system, or a part of it, he will not throw good money after loads of incomprehensible debt load. One of the first lessons I have learned in high school economics and was repeated through intermediate level econ, finance, and accounting courses: do not throw good money after bad.

21 comments:

LeahGG said...

judges are unlikely to be swayed by the "in the streets" argument particularly if there are any all girls charter/public schools in the area to where the girls could be transferred.

Mike S. said...

Forget the school for a moment. What kind of idiot banker lent a nonprofit with a total cash flow of (apparently) $300K/year enough money that they can be $1M behind on the mortgage?

Mike S. said...

And what is going on with the IRS? Their liability is probably less than 1/3 payroll yet the owe something like what should be 3 years of payroll. Did this school shrink suddenly? or have they been not paying taxes for a decade?

The finances of this school don't seem to make any sense.

Orthonomics said...

LeahGG--I don't see a judge being convinced of such an argument no matter what the public/charter school situation is. The citizens of the United States of America provide a public education for all citizens, these citzens included. In the rest of the world, private schooling is considered a commodity which parents can choose to purchase. The school is not viable. The creditors need paid. And the court has ordered that the assets be liquidated to pay debtors who are the protected party.

MikeS-I'm as confused as you, but I believe that the back mortgage payments are only a sliver of the $1mil the school is on the hook for. Half of that is payroll liabilities owed to the IRS. I'm not sure that the other half is all mortgage or only partially mortgage. We will probably never know.

Not being able to pay payroll liabilities, just like not being able to make payroll is a huge warning sign vis a vis viability. I find it very frustrating to continually read about schools who are behind on payroll and the "solution" is believed to be fundraising.

Anonymous said...

I hope that all people who run Yeshivas and other non-profits get advice from lawyers and accountants as to how to operate their businesses without getting into trouble. In some situations there can be criminal charges and jail time for withholding taxes from employee's checks and not turning the withheld amounts over to the IRS and state tax authorities. The best thing to do is to use a reputable payroll service that calculates how much is owed for withholding, FICA, etc. and making sure those amounts get paid to the taxing authorities.

Anonymous said...

They don't use payroll services because their payrolls are full of shenanigans.

Avi said...

This isn't a tuition or economics story, this is simply gross negligence (or, sadly, outright fraud).

Shoshana Z. said...

So where is the money? Were they stealing it?

Anonymous said...

Shoshan - I would not presume there was theft, at least not in the traditional meaning of the word. They probably just didn't collect enough in tuitions and donations and used the money for salaries and other expenses.

Dave said...

If you withhold taxes from your employees, and then don't send that to the government, how is that *not* theft?

Anonymous said...

Here's how it could have happened. They withheld the payroll taxes and "meant" to pay it to the IRS, but then the roof leaked, the plumbing had a problem, etc.. The money was used to take care of that with the sincere intention of it being replaced, but then they got behind and well.....It's kind of like what our government is doing with our tax dollars. Only that ponzi scheme is intentional fraud and I judge Bais Yaakov favorably.

Shoshana Z. said...

I actually owe the government quite a hefty sum this year. I wonder if they would judge me favorably if I decided to use that money to pay off other debts, buy food, or take a vacation? That argument just doesn't wash with me at all...

Anonymous said...

sounds like the madoff school of accounting

Anonymous said...

Shoshana,

With all due respect, it is obvious that you are not familiar with running a business of substantial size. When a payroll is due...in this case paying low-wage teachers...an employer will usually opt to pay his employee and then figure out how to pay the KGB (excuse me, IRS). Judging BY favorably in this case meant that they did indeed intend to pay the taxes, but literally could not, without stiffing the employee. There's a big difference between buying food and taking a vacation, btw. And if it sounds like I don't respect the government...you are right...I don't. The IRS are leeches and the tax code is confiscatory and socialist in its structure. But I digress:)

Shoshana Z. said...

You're right, I'm no business owner. But I know how to balance my books. And if I was taking other people's money to run my business, while my employees were depending on me for their livelihoods, I wouldn't monkey around with paying what I owe. There are laws and processes that apply to us in this country and we don't get to ignore them simply based on the fact that we don't like them. That seems to be a strong undercurrent in the frum world and it is very (!) distasteful!

Zach Kessin said...

I will take exception to the comparison of the IRS with the KGB, but that is a side point. If you don't like the tax code take it up with congress. But don't use it as an excuse to not pay your bills.

This to get to this point the school must have been insolvent for a long time. But if you

Orthonomics said...

Anonymous-I am politically involved and speak to politicians regularly about the burden of taxes.

There is a very strong undercurrent of shtick in the frum world. I realize that in the outside world there are people behind on their taxes and probably behind on payroll, but it is nowhere as prevelant and employees will walk. What goes on with "creative accounting" is just plain wrong.

If you withhold from an employee's paycheck and do not send the withholdings to the IRS and State, you are stealing from the employee. I don't see how we can build Torah on theft. And the theft is from the employee insofar as there are withholdings from the employee's paycheck that are diverted from other causes.

Anonymous said...

In the main, financial system we have built in the Orthodox world is unsustainable.

Much needs to be done.

MH said...

If you withhold from an employee's paycheck and do not send the withholdings to the IRS and State, you are not only stealing from the employee, but guilty of a federal crime.

Forget the other issues, you should go to jail. Plain and simple.

megapixel said...

i imagine the school was hoping to build up its income by expanding enrollment and growing the parent body. Unfortunately this did not happen due to a mishegas in the Lakewood Mentality. This school is associated with a Day School in people's mind since it was originally a day school before it switched gears and became a bais yaakov. Therefore people were not inclined to send their kids there. The Mishegas that I refer to is that although there is quite a contigent of left leaning families in town, they all seem to want to send their kids to right wing schools, even thought they would fit in better at this bais yakov. so the school failed because the few families who sent there (and were happy with the school) were not enough to keep it financially viable. The few rich guys that were supporting the school stopped doing so.

very sad for these kids and their families because there is a huge space crunch in girls schools in town so although some kids have been absorbed into other schools, some are sadly still out of school.

Anonymous said...

"sadly still out of school" - I think that there is no enforcement of truancy in most districts today, and frum people happily know that. Even if truancy were enforced, it would be political suicide in certain municipalities. This is the only way many yeshivas get away with offering literally no secular studies. (see this post