Did Yeshiva Give Away Millions in Deal To Unload Einstein Medical School?
By Paul Berger September 15, 2015
The news came like a one-two punch.
In an email to staff, students and alumni, Yeshiva University President Richard Joel said on September 10 that Y.U. had finally sealed a deal relinquishing ownership of the Albert Einstein College of Medicine, into the hands of the not-for-profit that owns Einstein’s teaching hospital, Montefiore Medical Center, in the Bronx.
Then Joel, the charismatic and at times controversial Y.U. leader, announced that he would step down at the end of his current term.
Y.U.’s tight-knit and fiercely loyal community has a couple of years to ponder the ramifications of Joel’s departure. One of the best-paid executives in the Jewish communal world, with a salary and compensation package worth $1.3 million, Joel will not end his term until 2018.
That leaves three years till Joel’s tenure ends — too early to know in what financial state his successor will find Modern Orthodoxy’s flagship institution.
Last year, when the average university endowment in America grew by 15%, Y.U.’s endowment lost $90 million — a fall of 7.5%. The school’s credit rating languishes at junk status, and its annual operating deficits have been as high as $108 million.
Right now, however, the Modern Orthodox and wider Jewish community are left to ponder what to make of Y.U.’s loss of Einstein, which, as Joel pointed out in a statement announcing the deal, was founded 60 years ago, when “Jewish students were turned away from other schools.”
Y.U. and its partner in the new joint medical school venture, Montefiore Health System, have refused to share financial details of the deal.
But documents obtained by the Forward show that Y.U. is about to transfer hundreds of millions of dollars in assets, including real estate and a portion of its endowment, to a new entity in which Y.U. is the minority partner.
The documents, which Montefiore submitted to the IRS over the past year seeking charitable status, state that Montefiore will be the dominant partner, with a 51% voting interest in the new medical school.
They also state that the joint venture will pay Y.U. “fair market value” for the medical school’s buildings. But they do not state whether Y.U. will be reimbursed for the loss of a significant part of its endowment, which last year totaled $1.1 billion.
Both sides have repeatedly stated that Montefiore will assume financial and operational control of the medical school, while Y.U. remains the school’s degree-granting authority.
But the IRS documents hedge on just how long this will continue. Montefiore states that Y.U. will exercise this function “for at least the next several years,” leaving somewhat unclear whether Y.U.’s degree-granting role is envisioned as permanent.
Y.U.’s press department did not respond to requests September 9 and 10 for clarity on the agreement.
A Montefiore spokeswoman, Tracy Gurrisi, said that it would be premature to release figures related to the financial aspects of the deal.
“This was a highly complex legal and regulatory transaction, and all the assets have not yet transferred or settled,” Gurrisi said in an email statement. “We hope to be able to share additional information in the next few weeks.”
A clue as to some of the terms of the deal, was revealed in a September 14 statement by the investor ratings service Moody’s.
Moody’s said that Y.U. has been relieved of all debt related to the medical school, including $136 million of rated debt and $24 million of mortgage debt. Y.U. is set to receive a stream of cash over the next 22 years.
Einstein’s faculty and students have agitated for the Montefiore deal for more than a year, fearing that if an agreement could not be reached it could imperil the costly research side of the medical school.
At the start of this year, a group of faculty chairmen reported Joel and Y.U.’s board to New York’s attorney general, accusing them of breaching their fiduciary responsibility to the medical school. Einstein’s faculty senate also issued a vote of no confidence in Joel and in Y.U.’s board.
Jeffrey Segall, speaker of Einstein’s faculty senate, told the Forward that the closing of the deal offered the medical school “reassurance.”
Segall cautioned that the process of transitioning control of the medical school’s operations, including its academic activity, could take years. But he said that the deal gave faculty “confidence about the future of Einstein.”
But what about reassurance for Y.U., which has been forced to transfer Einstein because of crushing fiscal woes?
A prestigious university ranked 52nd nationally by U.S. News &World Report, Y.U. is one of the central institutions of Modern Orthodoxy.
Its single-sex undergraduate schools, Yeshiva College and Stern College for Women, are magnets for Modern Orthodox men and women, respectively. Its rabbinical school, the Rabbi Isaac Elchanan Theological Seminary, graduates some of the most influential rabbis in the world.
Meanwhile, Y.U.’s graduate schools, including the Benjamin N. Cardozo School of Law and Y.U.’s former Albert Einstein College of Medicine, draw students from across the religious and secular spectrum, within and far beyond the Jewish community.
Y.U. has recorded operating deficits of between $50 million and $108 million in each of the past eight years.
Last year, Moody’s lowered Y.U.’s credit rating to junk status, and Standard & Poor’s noted that despite Y.U.’s best efforts, its “financial performance has weakened significantly over the past six years and plans to improve performance have not materialized.”
Moody’s, in its September 14 statement, left Y.U.’s credit rating unchanged.
Analysts at the ratings service said that although a significant debt had been wiped from Y.U.’s books, they expect operating deficits to continue for at least the next year.
Controversially, last year Joel blamed Y.U.’s fiscal problems on antiquated financial accounting systems as well as on current and former staff members who he said had misled him about the university’s finances.
But Joel has been aware of Y.U.’s operating deficits since 2008, and aware of the fact that those deficits stemmed partly from a spending spree that Joel himself embarked on soon after taking the helm of Y.U. 12 years ago.
During his first five years in office, Joel drastically expanded Y.U.’s faculty, bought up real estate and embarked on two enormous building projects. In 2008, Joel told New York’s Jewish Week: “We made these improvements knowing that after the first five years we would have to spend the next five years marshaling the resources to pay for it.”
Unfortunately for Joel, those five years coincided with a financial crisis as well as with $100 million in losses to Bernard Madoff, who was Y.U.’s treasurer.
Far from being taken by surprise by Y.U.’s rudimentary accounting system, Y.U.’s auditors warned as early as 2011 that the system, which relied on Excel spreadsheets, increased “the risk of material misstatement to the monthly and annual financial statements.”
In recent years, Y.U. has tried to stem its losses by merging the undergraduate faculty of its single-sex men’s and women’s colleges under one dean, by reducing staff and selling off buildings.
But Einstein, a research-intensive medical school that has suffered from federal cutbacks in medical research spending, has long been a key target of Y.U.’s cost-cutting measures.
According to Y.U., Einstein accounts for two-thirds of the school’s annual operating deficits, though a Standard & Poor’s report from December 2014 stated that Einstein accounted for just 40% of Y.U.’s $84 million deficit in the past financial year.
Montefiore’s IRS filings estimate that Einstein’s deficits in 2016 and 2017 for research alone will be about $67 million annually.
That’s a significant deficit to be wiped off Y.U.’s books. Only the audited financial statements will show whether it is enough to halt Y.U.’s fiscal crisis.
Contact Paul Berger at [email protected] or on Twitter, @pdberger
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