Averting Disaster

AVERTING DISASTER BY: LARRY GILL / SHALHEVET HIGH SCHOOL / BOARD PRESIDENT

From its inception over 20 years ago, Shalhevet High School has aspired to be a top-tier Modern Orthodox school with an emphasis on the moral development of our students.

In 2008, that vision seemed very likely to die under the weight of financial burdens and inopportune strategic decision making.

A steady decrease in the school’s enrollment coincided with a rapid increase in both the number of students receiving financial assistance and the total amount of assistance. The school attempted to stem the drop in enrollment by accepting students and families who were not mission-appropriate.

Unfortunately, doing so diluted the value of the very product being offered.

While many schools go through something similar from time to time, in our case, our desperate attempt to bolster enrollment pushed a struggling school to the brink of extinction.

Many in the Los Angeles community were writing the school off. The school had spent more than a decade surviving by borrowing money from banks and individuals, and found itself significantly over-leveraged with close to $18 million dollars of total debt and running a $2mm annual deficit on a $5mm total budget. The notion of closing the entire school did not seem far-fetched.

Instead, with dedication to the mission, effective partnership between professionals and lay leadership, and important professional advice and assistance, I believe the school’s narrative from that dark point offers something of a template for effecting a turnaround of an ailing Jewish school.

The following are the five steps SHS took to change this story for the better:

THE YU SCHOOL PARTNERSHIP SPRING QUARTERLY UPDATE

AVERTING DISASTER BY: LARRY GILL / SHALHEVET HIGH SCHOOL / BOARD PRESIDENT

STOP THE BLEEDING The first step was a painful one. In an effort to increase enrollment at the high school by creating its own feeder source, SHS had created an early childhood, lower, and middle school program. But the demographic idiosyncrasies of the Los Angeles Jewish community would not support the school’s existence. The effort required to find students to fill those seats not only eroded the early childhood, lower, and middle school’s financial viability, but in fact, cannibalized the finances of the entire institution, high school included. After careful analysis with the assistance of able professional consultants, the school’s board made the difficult decision to close the early childhood, lower, and middle school programs.

Believe me when I tell you that the act of closing a Jewish school, thereby reducing the number of kids with access to a Jewish education, was not undertaken in any cavalier fashion and weighed heavily on the lay leadership.

But I have zero doubt, and most of the community understands at this point, that the institution would not have survived without the move.

"Believe me when I tell you that the act of closing a Jewish school...was not undertaken in any cavalier fashion and weighed heavily on the lay leadership. But I have zero doubt ... that the institution would not have survived without the move."

THE YU SCHOOL PARTNERSHIP SPRING QUARTERLY UPDATE

GET THE RIGHT PEOPLE ON THE BUS The next piece of the puzzle provided the lynchpin of the successful turnaround; SHS needed the right head of school to help us achieve our goals.

With the invaluable assistance of Dr. Scott Goldberg and the YUSP, we were introduced to Rabbi Ari Segal. Rabbi Segal provided a mix of charismatic educational vision and business savvy (he was completing his MBA at Emory University when he signed with SHS) that was perfectly suited for the challenge at hand.

As luck would have it, Rabbi Segal was himself looking for a new challenge, and SHS was thrilled to oblige.

CREATE A PARTNERSHIP Rabbi Segal and I (as president of the board) hit the ground running.

While diffused lay and professional leadership may be preferable, in crisis mode we made the decision to circle the wagons. We both believe this proved to be the most effective means of moving forward.

Rabbi Segal and I developed a strategic plan for the turnaround - a document that would serve as our roadmap. The plan included goals related to all aspects of the community, including: financial planning, development, recruiting, admissions, public relations, and board recruitment, to name a few.

THE YU SCHOOL PARTNERSHIP SPRING QUARTERLY UPDATE

DRIVE THE BUS The next steps provided some tense moments and emphasized the importance the of the lay-professional partnership. Despite the chaotic atmosphere, the school had in place several very strong professionals. As an important first step, we had to engage those key team members and obtain their full buy-in of the turnaround.

These professionals understandably were considering moving on to a different situation, and they did not yet know their new head of school. I think the solidity of the partnership I shared with Rabbi Segal and the clarity of the vision ultimately convinced them to give it a try.

We next had to align the school’s admissions standards with its core mission. The move to take only "mission appropriate" students provided a significant challenge at first, given the state of the school’s enrollment and finances. The full board of directors had to support a process that had the potential to increase the school’s already enormous deficit, and the school’s cadre of regular donors was exhausted. After thorough discussion, the board gave Rabbi Segal the full green-light to make this leap of faith, and the policy shift almost immediately changed the reputation of the school. Though we had conceived the strategic plan while hunkered down, we immediately recognized the vital role of full transparency with the board, the faculty, and other key players in the community.

In meeting after meeting, Rabbi Segal and I outlined our turnaround plan, emphasizing the potential pain points along the way. We would right-size the school’s staffing, rebid contracts with long time vendors, and adjust faculty and staff contracts to meet industry norms. The process at times proved quite painful for many beloved teachers and other school staff. But clear and honest communication helped alleviate the uncertainty, or alternatively afforded people the opportunity to opt out if they did not see themselves as a fit with the new direction.

GET THE FINANCIAL HOUSE IN ORDER All of these steps required rightsizing the balance sheet, and the school’s financial situation remained precarious. Despite the fact that Rabbi Segal had eliminated the deficit and balanced the operational budget, the school was facing imminent default on a bank loan and was forced to consider several difficult alternatives, some rather draconian. In addition, SHS was laboring to meet the requirements of a grant program designed to provide incentives to build an endowment.

After multiple discussions and negotiations with the school’s bank and the individuals who had previously made emergency survival loans to the school, the board embarked upon a multi-step process: 1. The board decided to sell half of the school’s real estate footprint, which had been rendered unnecessary following the closing of the early childhood, lower, and middle school.

2. Proceeds of the sale would be used to: (i) build a new campus on the remaining property; (ii) pay down and renegotiate certain of the school’s outstanding debt; and (iii) help us meet the requirements of the endowment grant.

3. Simultaneously, the school embarked upon a capital campaign. Because the school had proceeds of the sale to spend on the facility construction, gifts could be directed towards the building or the grant/endowment requirements, whichever that donor preferred.

THE YU SCHOOL PARTNERSHIP SPRING QUARTERLY UPDATE

AVERTING DISASTER BY: LARRY GILL / SHALHEVET HIGH SCHOOL / BOARD PRESIDENT

One very important decision at this point proved essential to the school’s success. We made the decision to engage the services of Steven Stogel, who had built an impressive career specializing in real estate development for non-profit entities. In my experience, boards usually choose to utilize the skills and talents of their members rather than hiring professionals to save money. Luckily, Shalhevet’s board was comprised of several people experienced in real estate and finance.

The decision to allocate some of the proceeds of our recapitalization to professional guidance, while not easy at the time, has paid massive dividends. From the earliest planning stage through the pending refinance of the school, Mr. Stogel’s leadership saved us hundreds of thousands of dollars by keeping the project on time and under budget. Perhaps most importantly, rather than viewing the construction project and related capital campaign as a burden, Mr. Stogel helped us realize the opportunity afforded us by the process.

All of the sudden, the school found itself with momentum. SHS’s bank lenders, who had stayed with the school through the most difficult of times, did not want to miss the opportunity to take part in the success story. Several of the individuals who had extended rescue loans in the past agreed to forgive all or a portion of their loans.

THE YU SCHOOL PARTNERSHIP SPRING QUARTERLY UPDATE

With the swell of excitement surrounding the school and with the energy and vision provided by Rabbi Segal, new donors stepped up, and perhaps even more interestingly, several old time donors who had lost ties with the school returned to make new gifts. Enrollment spiked. Having ebbed to a low in the wake of the school’s difficulty, the student count increased 10 to 20% annually. Indeed, as you read this, the school has hit maximum capacity and is faced with the new problem of turning away almost 50% of applicants. In keeping with Mr. Stogel’s prediction and advice, the school’s bank lender became so impressed with Shalhevet and its leadership and mission that it requested to stay involved with the school, to help us fulfill our requirements under the endowment grant, and to provide long term refinancing on terms that will insure the school’s viability going forward.

CLOSING THOUGHTS...

Yes, Shalhevet is enjoying life on a beautiful new campus, designed to fit our school’s unique mission and the requirements of 21st century education - constructed on time and under budget. But the story of Shalhevet High School is not about the construction of an edifice. This school's story is about a core group of dedicated people – administrators, educators, and lay leaders – who devoted massive amounts of time, energy, and money to rescue an institution that they loved, but that was foundering. The building is a byproduct of the concerted workout effort. With the help of dynamic leadership and sound professional advice, we were able to turn the crisis into the catalyst for a full structural, operational and financial reorganization.

To be sure, the work is not done. But the future looks bright.