Education

After New Schools’ collapse, questions emerge about finances, spending

Tony Habit, executive director of N.C. New Schools. In April, New Schools abruptly shut down, giving its 80 employees less than 24 hours notice that their jobs had evaporated. It filed for bankruptcy, showing debts of $1.5 million more than its assets.
Tony Habit, executive director of N.C. New Schools. In April, New Schools abruptly shut down, giving its 80 employees less than 24 hours notice that their jobs had evaporated. It filed for bankruptcy, showing debts of $1.5 million more than its assets. 2014 News and Observer file photo

NC New Schools, a champion of specialty and early-college high schools, was a rock star in the world of education.

The group landed several grants exceeding $10 million. It got federal grants and money from Bill and Melinda Gates and several of North Carolina’s biggest businesses. It made North Carolina the nation’s leader in special high schools, which provide college-level classes for high school students. Last year, the organization spread its work to four other states.

Then in April, New Schools abruptly shut down, giving its 80 employees less than 24 hours notice that their jobs had evaporated. It filed for bankruptcy, showing debts of $1.5 million more than its assets.

The sudden collapse shocked many in the world of education. Tony Habit, the executive director since the group’s founding in 2003, attributed the financial failure to the organization’s expansion.

“Our growth exceeded the capability of our finance office,” Habit said in an interview. “By the time we discovered the gap, it was insurmountable.”

Habit said the financial problem became clear to him in January.

Internal emails and spreadsheets obtained by The News & Observer show that Habit knew at least as early as June 2015 that New Schools could face a $2.1 million deficit, a huge problem for an organization with a $10.5 million budget. The board chairman said he did not see records of this possible deficit until after the agency closed.

All of a sudden, the bottom fell out. How you go from an optimistic, pro-growth, proactive position into bankruptcy in such a short time is puzzling.

Sam Houston, director of the N.C. Science, Technology and Math Education Center

Despite the looming shortfall, Habit moved NC New Schools to a new, more expensive office in Research Triangle Park and outfitted the space with $600,000 worth of new furniture, computers and audiovisual equipment, bankruptcy records show. New Schools continued to pay rent on the office it vacated near Crabtree Valley Mall in Raleigh. Bankruptcy records show that New Schools paid 50 percent more each month for the RTP office, which was significantly larger.

 
 

In past months, NC New Schools racked up a million dollars in debt. The organization borrowed $500,000 in a line of credit from Wells Fargo Bank, and another half-million to outfit its new office in Research Triangle Park.

Sam Houston, director of the N.C. Science, Technology and Math Education Center, was instrumental in the founding of New Schools. He said he attended a conference at New Schools’ new RTP office days before the organization closed.

Houston heard that Habit was busy trying to raise money from donors, but he said the tone of the meeting was upbeat.

“All of a sudden, the bottom fell out,” Houston said. “How you go from an optimistic, pro-growth, proactive position into bankruptcy in such a short time is puzzling.”

School systems stiffed

The North Carolina New Schools Project started in 2003 with a five-year, $11 million grant from the Bill and Melinda Gates Foundation to restructure secondary education by creating smaller high schools. The Gates funding ended, but New Schools won at least two federal grants totaling $35 million and millions more in grants from foundations connected to Duke Energy, GlaxoSmithKline and other corporations.

The organization supported early-college high schools, regional specialty high schools and STEM (science, technology, engineering and mathematics) schools. Much of the money was spent on staff and consultants who trained teachers and administrators.

Early-college high schools target students who will be the first in their family to attend college and offer students the chance to graduate with up to two years of college credit or an associate’s degree. Those schools are standouts for their high graduation rates.

The organization began offering its services for hire in recent years, charging school districts upfront for training teachers or coaching principals over the course of the school year.

Last year, New Schools added Breakthrough Learning to its name and began working in South Carolina, Mississippi, Illinois and Indiana.

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.

New Schools, for example, owes $261,780.02 to Duplin County Schools. Dawn Craft, a spokeswoman for the school system, said Duplin County Schools paid in advance for four college liaisons, specialized counselors who guide students into college classes and beyond. Craft said Duplin County expects to be reimbursed fully.

Craft was effusive in praising New Schools’ work in Duplin County, saying the district was en route to putting the entire school system on the early college model.

“We want every child to dream of college,” she said. “We want to elevate rigor in every classroom.”

Habit said New Schools did not charge enough for its services, which helped cause the cash flow problem.

“We should have attached a margin” to the consulting contracts, he said.

An optimistic budget

New Schools, like state government and public schools, ran on a fiscal year calendar that started July 1. As a nonprofit, the group’s tax returns are public record. The most recent showed a drop in net assets, from $7.7 million in July 2012 to $5 million in June 2014.

In June 2015, the organization was finalizing its budget for the upcoming 2015-2016 fiscal year.

On June 12, 2015, finance director Wendi Knapke produced a budget spreadsheet that projected a $2.1 million deficit for the coming year.

Two days later, Knapke sent Habit a budget that showed a modest surplus.

I don’t think Tony or any staff member was purposefully withholding information from the board.

Jeffrey Corbett, chairman of the New Schools board of directors and a senior Duke Energy executive in Charlotte

“While I did get it to break even, it wasn’t easy,” Knapke said in an email to Habit. “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.”

Habit responded by asking Knapke to bring copies of the revised budget to a meeting.

Jeffrey Corbett, the chairman of New Schools’ board of directors, said he did not know of this spreadsheet, email or potential $2.1 million gap until May 2016, after the organization closed and filed for bankruptcy.

“In hindsight, this was certainly information we should have had,” said Corbett, a senior Duke Energy executive in Charlotte. “I don’t think Tony or any staff member was purposefully withholding information from the board.”

Corbett said the board first learned of the financial problems in December of last year, when the budget showed that a shortfall in revenue caused the group to spend $1 million of its assets. Some expected receipts had been counted twice, and some revenue had not materialized.

Corbett said the board eventually discovered it would have to close a $3 million gap by July 1 of this year, either by cutting expenses or raising new funds.

Two leases at once

By December, though, New Schools had already committed to its new RTP office. It spent some $600,000 on furniture, computers and video conferencing equipment, according to its bankruptcy filings.

“It was a nice office, really well-equipped, with flat screens in every conference room,” said Houston, the education center director.

For the first six months of 2016, New Schools paid rent on both the new office and the office near Crabtree Valley Mall that it moved from in January.

In his last 12 months in the job, Habit was paid $210,000 in salary and benefits, according to bankruptcy records. A native of coastal North Carolina, Habit worked as a counselor for special needs students in several school districts. He worked at Wake Education Partnership before becoming a founding director of NC New Schools, where he developed a national reputation in school reform circles. The agency has established nearly 80 early college high schools, making North Carolina the state with the most such hybrid schools in the nation.

In February, Habit sent an email to senior staffers telling them to send finance items directly to him for the next week, not to the finance staff.

“Thank you for routing your finance items to me at this time instead of to Emily Howard or others on the finance team,” Habit wrote. “This week it is important that we do not take new requests to the F&O team – share them with me instead – so that they can better manage the flow of things.”

In the months preceding the bankruptcy, Habit reshuffled the finance department, dismissing Wendi Knapke and others. Around this time, Habit brought his sister, Patti Ann Habit, a certified public accountant, to work in the finance department, apparently as a volunteer.

In an April 4, 2016, email to staff, Habit discussed the financial problems.

“First, as president, I am responsible for our organization’s performance,” Habit wrote. “Serious gaps have existed, and I take these weaknesses very seriously. When it became clear that our financial oversight was flawed, I initiated action with Executive Team.”

This is not some nameless corporation. This is about living out values around the meaning of public education to children and to communities.

Tony Habit, executive director of NC News Schools

He promised that the finance department would begin providing regular, reliable financial statements and budgets.

The organization closed three weeks later. About 80 employees lost their jobs. The RTP office space is vacant, its conference rooms stacked with computer monitors and telephones.

Habit said the bankruptcy has been very personal for him.

“This is not some nameless corporation,” he said. “This is about living out values around the meaning of public education to children and to communities.”

After an initial interview June 1, Habit declined further interviews. He did respond to a question by email that his sister was a retired accountant who volunteered to support the agency.

“At no point was she compensated,” Habit wrote. “At no point was she allowed to direct the use of any funds. ... As a volunteer she saved the organization thousands of dollars.”

Correction: An earlier version of the story wrongly stated that Emily Howard was dismissed. She lost her job when the organization folded.

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