Analysis: Here's What Happens to Endowments When Colleges Close

Attorneys general will have to navigate legal thickets to dispose of relatively tiny sums as small colleges like Dowling in New York close at rates more than three times higher than before the recession, Bloomberg News reported on Monday. They leave behind not just physical plants, but the remnants of endowments, which are a well of frustration for donors’ descendants, vendors owed money and bondholders. The biggest victims may be the states that have to expend mighty efforts to settle minuscule amounts of cash. “The attorney general or state regulators are going to have to get more involved in bankruptcy cases,” said Lawrence G. McMichael, a Philadelphia lawyer who last year represented Morris Brown College when it sought protection from its creditors. In 2016, 763 higher-education institutions closed, including for-profit schools, according to the U.S. Department of Education. That’s the most since 2012. Four-year, nonprofit institutions at risk rely heavily on tuition to cover expenses, a structure that Moody’s Investors Service deemed inefficient in a 2015 report. However, in the context of bankruptcy law, endowments aren’t considered property of colleges because the colleges don’t fully control their use. Instead, a patchwork of state laws governs endowments, said Susan Menditto, the director of accounting policy at the National Association of College and University Budget Officers. In many states, the money must be used for a similar purpose as the original intent, setting up a financial feeding frenzy.

Commentary: Declare Bankruptcy in Puerto Rico
In a rare show of bipartisan support, Congress passed a bill last June to save Puerto Rico from a debt spiral and certain economic collapse. Known as “PROMESA,” the bill was a tough compromise based on hard facts about the state of the island’s finances. Unfortunately, an outbreak of wishful thinking on the part of the local government threatens to sabotage the hard-won gains the bill promises for the 3.5 million Americans who call Puerto Rico home, according to a Bloomberg News commentary. Neither Democrats nor Republicans got all they asked for with PROMESA. Critically, the law failed to provide Puerto Rico’s most vulnerable with Medicaid funding and an earned income tax credit – matters that Congress still needs urgently to address. But it did create two mechanisms essential to ending the island's fiscal crisis and building a foundation for growth. First, it established a powerful independent Oversight Board that has been working intensively, without pay, to understand the island’s tangled financials and collaborate with the Puerto Rican government on a 10-year fiscal plan. Second, it gave Puerto Rico's governor and the board a powerful tool to reduce the island’s $70 billion in debt in a bankruptcy-like proceeding before a Federal court. The tool is all-inclusive, with no carve-outs for special interests, despite millions of dollars spent by hedge funds to kill the bill.

 

Kentucky County Is an Economic Prisoner of Its Own Jail

Grant County, Ky., has been burning through cash to pay for a jail that is about a third empty because Kentucky moved state inmates elsewhere after local officials briefly planned to shut it down, Bloomberg News reported yesterday. Despite the loss of prisoners, the county later decided it was more expensive to close the indebted facility than to keep it running. As a result, it’s contending with a budget shortfall that’s left it seeking to avoid becoming the state’s first county to file for bankruptcy since the Great Depression. Grant County sold about $5.3 million of bonds to refurbish the facility two years ago, pledging to use the government’s general funds, instead of just jail revenue, to cover the debt. S&P Global Ratings said the county’s budgetary performance has "materially weakened" and it could face a multi-notch downgrade. While the county had $2 million in reserves at the end of June 2015, that’s expected to be largely used up over the next three months, according to S&P.

 

Analysis: The State of State Teachers’ Pension Plans

As teachers across the country retire, their pensions are being subsidized by newly hired teachers to a surprising degree. Teachers’ pension plans have always rewarded long-serving veterans at the expense of short-termers. But now, as more and more plans develop shortfalls, states have been imposing cost-cutting measures, and recent research shows that the newest hires are bearing the brunt of the changes, raising questions of fairness, according to a New York Times report on Tuesday. The Urban Institute has graded America’s state-run pension systems on their performance in a few areas: their financial strength; how well they provide retirement security to short-term or long-term workers; the workplace incentives they offer various age groups; and whether participating branches of government are funding them properly. Grades for all types of public pensions are available on the Urban Institute’s website, where they can be filtered for individual strengths and weaknesses. No states got an A and only six states received a B: Arkansas, Delaware, Florida, New York, Oregon and Wyoming. Most states — 33 — received a C, while six got a D. The last six — Connecticut, the District of Columbia, Kentucky, Massachusetts, Ohio and Rhode Island — each received an F. Getting an F could mean the plan offers few rewards for younger workers, is less than 60 percent funded or pays meager retirement income relative to salary, among other problems. Rhode Island improved its plan enough in 2013 to get a B on the new version, but it still has so many people in the older, failing plan that the overall grade was an F.

 

Latest ABI Podcast: Author Sheds Light on Vague Areas of Ordinary Course of Business Defense

ABI Resident Scholar Drew Dawson talks with Neil Steinkamp of Stout Risius Ross (New York) about his recently released Understanding Ordinary: A Primer on Financial and Economic Considerations for the Ordinary Course Defenses to Bankruptcy Preference Actions, 2nd Edition. Steinkamp discusses the new edition of Understanding Ordinary, bankruptcy preference matters and his expertise in the ordinary course of business defense.


Continue exploring the ordinary course of business defense in bankruptcy by ordering your copy of Steinkamp's second edition of Understanding Ordinary. Click here to purchase

ASM Spotlight:How to Value Anything? ABI Board Member Dan Dooley Previews Session on Expert Techniques for Difficult Valuations

What issues will experts be examining on the “How to Value Anything: The Most Difficult Valuations” panel? ABI Board Member Dan Dooley of MorrisAnderson (Chicago), who will moderate the session, provides a preview (click graphic below):



Don't miss this session and other engaging speakers at the 2017 Annual Spring Meeting! Click here for more information and to register.

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