New Schools’ Collapse: Could Their Board Have Done More to Prevent It?

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June 11, 2016; News & Observer

When North Carolina New Schools closed its doors suddenly in April, we could only speculate about what had brought this once high-flying organization to an end. Twitter’s 140-character limit was big enough to contain the organization’s final words: “It is with heavy hearts that we officially close the doors to NC New Schools. Thank you to all that supported us over the years.”

The immediate facts of what took place are quite stark. The fall was so rapid that New Schools’ employees had but a day’s notice of their impending unemployment. The school districts that had prepaid contracts with New Schools for a range of services were left mid-year with no backup or plan for finding a replacement.

Within days, New School filed for bankruptcy, claiming it had debts in excess of $1.5 million. According to the News & Observer, “The bankruptcy filing shows that New Schools owes more than $950,000 to school districts and schools across the state, most of them rural and poor. Some of the owed money is for training the schools never received and some of it is to reimburse schools for positions that were paid for in advance.”

Was this situational unavoidable? That’s how board president Jeffrey Corbett saw it. “We ran into cash flow problems that were directly related to growth and the speed of growth. It was very, very unfortunate.” Or, as NPQ speculated at the time, was it another example of inadequate oversight and control resulting in a preventable disaster?

The cash flow issues that come with government contracts are well known among nonprofits that know the business model, as we have mentioned repeatedly over the last few months, and organizations ignore it at their peril.

We are now learning that the problems were known by staff for many months but may have been hidden from the organization’s board of directors. A projected budget for the organization’s final year had shown a projected deficit of $2.1 million, but the budget shown to the board was managed to show a modest surplus. New Schools’ finance director described her work in budget balancing in an email to Habit: “While I did get it to break even, it wasn’t easy. It will require closer attention to costs like travel, event costs, meeting costs, etc. It also does NOT include any salary increases other than those you gave me.

Despite this caution, nothing slowed New Schools’ aggressive drive forward and no serious expense controls were put in place. New Schools executed a lease for larger and more expensive offices just months before closing while continuing to pay rent on its former office location. It spent $600,000 on furniture and equipment for the new space. As the year went on, cash flow became so difficult that, in violation of law, disbursements of federal grant funds were not made in a timely fashion.

Nonprofit organizations led by aggressive, dedicated staff driven to fulfill their vision can result in great success. But that energy also poses great danger. Boards are responsible for providing oversight and control to protect the organization when the line between charismatic, visionary leadership and irresponsibility is being crossed. New Schools’ board was not without signs of trouble. Its most recent 990, which requires board review, showed a significant decrease in assets. Efforts to raise new funds were known outside the organization. Sam Houston, the director of the N.C. Science, Technology and Math Education Center who was instrumental in the founding of New Schools, told the News & Observer he was “aware of the fundraising efforts.”

Red flags surrounded New Schools’ demise, but they were not bright enough to prod this board to act. We hope this will serve as yet another lesson of the need for boards to take their responsibilities seriously, ask hard questions, and ensure they are getting the information they need to do their job.—Martin Levine