The Financial Restructuring of the American Orthodox Community

American Orthodoxy is in a financial crisis. Similar to other communities, in many Orthodox neighborhoods 10 percent or more of primary breadwinners cannot find employment. As a result of the tumbling S&P 500 and interest rates, many are suffering from ever-dwindling savings accounts and pension funds. Moreover, lower incomes, job insecurity and the decrease in donation-eligible securities with inflated values have resulted in reduced charitable giving. Certain institutions have, themselves, suffered losses through investment missteps or fraud.

Every crisis should inspire introspection, and as a community we should respond to this challenge by seeking the spiritual message behind it. At the same time, we must also confront the numerous, complex practical challenges that the economic crisis presents. Certainly, a priority must be providing for the financial and psychological needs of families facing economic despair. Yet even while funds must be raised for Jewish families across the country, monies must also be raised to support the communal infrastructure, now threatened by growing deficits and dwindling donations. We turn to God in times of need, and accept that all is in His control. Our hashkafah, however, demands that we also make normative pragmatic efforts to overcome challenges.

Regrettably, if the current passive and fragmented role of our leadership is any indication, our community’s response to current challenges will include only ad hoc and uncoordinated programs. Religious leaders, communal professionals and management and financial restructuring experts within the community will most likely fail to take the initiative and to devote the time necessary to develop a full-fledged communal restructuring plan. Moreover, even if some effort were to be expended on such a plan, it is unlikely that attention would be paid to halachic dictates, and the self-interests of power brokers and self-preservation of communal professionals would, in all probability, dominate.

But a better alternative exists. Perhaps the leading rabbinic, communal and lay leaders could put aside ideological differences and assume a true leadership role by creating a strategic plan for the community and its institutions. Leaders would need to commit the time and effort necessary for such an undertaking, and each leader should disqualify himself from issues affecting institutions he may be affiliated with.

The goal would be the creation of a strategic restructuring plan that would include the following:
• acknowledge new economic realities and project likely available communal funding and resources
• identify new programs and initiatives to address crisis-related community needs
• evaluate and prioritize the existing community-funded institutions and programs and
• reformulate the community’s institutions and programs, focusing on efficiency and efficacy.

This article does not offer a formula for a communal restructuring. Such an offer would be presumptuous and, in any event, foolhardy in light of the enormous obstacles. Rather, my goal is to encourage a discussion on this vital topic among community leaders, on both a national and local level.

Acknowledging the Challenge
Before any financial restructuring takes place, it is critical to acknowledge the severity of the challenges. Many Jewish charitable institutions, and certainly the collective communal infrastructure, remain oblivious to the bleak new economic realities. While a significant number of organizations have made cutbacks, it is necessary for us to begin discussing the inevitable restructuring of the community’s non-profit infrastructure. Optimists view the downturn as temporary and predict a resurgence of private philanthropy, tuition collections and foundation grants. While this is certainly possible, it is irresponsible to rely on a full economic recovery. Captains of industry are actively designing strategies for a possible worsening, or lingering stagnant, economy. Jewish community leaders must follow suit.

Furthermore, the eventual recovery may result in income levels that are far more modest than the extraordinary communal affluence previously enjoyed. Indeed, the prosperity witnessed over the past twenty years may have been anomalous, a mythical golden period, rather than a recurring stage in the economic cycle. The unprecedented wealth in the Jewish community during this period spurred the creation of numerous institutions and programs that address a wide array of communal needs. But while the spike in charitable giving created these initiatives, they all require significant funding to continue. If the ultimate economic rebound fails to restore previous levels of affluence, the current communal infrastructure will remain economically unsustainable, even when the economy returns to the top of its cycle.

Thus, our first responsibility is to acknowledge the severity of the financial crisis and the tenuousness of our economic future. Second, we must create comprehensive strategies to cope with the new economic realities. While a corporate CEO’s failure to respond to the financial crisis would constitute a breach of fiduciary duty to shareholders and creditors, a similar failure by Jewish communal leaders would be even graver.

Reviewing a Financial Balance Sheet
The first step in every financial restructuring is reviewing the balance sheet and analyzing cash flow projections. Each communally funded organization must engage in this process, and community leaders should do so for the aggregate of these institutions. Only after evaluating each assumption in the cash flow projections and examining every nuance of the balance sheet can an enterprise determine whether it is necessary to sell assets, cut costs or reduce staff or programs. Similarly, only after identifying the total resources available to the community’s charities can responsible decisions be made regarding charity triage.

Incidentally, a cash flow review may raise serious halachic concerns. Charities often improperly assign payment priority among competing creditors, such as employees, vendors or lenders, or between individuals within each category. Cash-strapped charities are occasionally forced to choose between paying debts and severely reducing programming or services. Even financially healthy Orthodox institutions often defer or neglect paying creditors or engage in strong-arm renegotiations, with cavalier disregard for the dictates of Choshen Mishpat and for the prohibition against chillul Hashem (the desecration of God’s name). Such behavior forces vendors as well as employees and their families to support the charity unwillingly. Occasionally, such exploitation by charities forces the creditors themselves to accept charity! Communal institutions and their board members must also explore the halachic propriety of hiring or maintaining staff when there is no certainty that their wages will be paid on a timely basis, if at all.

Reviewing a Programmatic Balance Sheet
Wealth is often cited as the source of decadent materialism and as a distraction from Torah study and spiritual growth. However, the economic success of American Orthodoxy over the past twenty years may have been an exception. During this era of prosperity, charitable funding provided for wide-ranging communal and individual needs, introducing programs previously unaffordable. Jewish education opportunities for children exploded, often including a post-high school year spent in Israel. Day school and yeshivah class sizes were reduced, many communities sustained competing schools, educators’ salaries increased and school buildings and facilities were upgraded. Private coffers also funded community kollels, outreach programs and a wide spectrum of social need and chesed projects. Indeed, despite the distraction of affluence, Torah study, such as Daf Yomi, and women’s Torah study flourished. Wealth certainly led to excesses, but among them was an impressive explosion of generosity.

This new era, however, has stretched the charitable dollar to the limit. Many programs have already been reduced, and this pattern will likely continue. As each organization decides which programs and services should continue and which should be cut, it is critical that each institution, as well as the aggregate of Jewish institutions, create a programmatic balance sheet. Every balance sheet lists assets and liabilities. Assets, in the case of non-profit organizations, consist of the various services and programs available to the community, as well as their tangential benefits. Liabilities include the costs of sustaining duplicative and less effective programs, and the threats to programs vulnerable to neglect.

The creation of an honest and objective programmatic balance sheet is a daunting task. While corporate assets can be quantified by market value or cash flow generation, programs must be valued by their contribution to the community. How is that analysis performed?

How are very distinct program models and objectives comparatively quantified? For example, how are the benefits of enhancing children’s education measured against caring for the elderly? How is outreach measured against inreach, and how are religious-development programs measured against initiatives addressing other needs, such as physical and mental health and sustenance?

Who makes these assessments? Are rabbinic authorities adequately trained in assessing communal needs and program effectiveness? Are they and lay leaders prepared to devote the time necessary to study the impact of various programs and their communal implications? Would non-rabbinic activists integrate into their analysis the necessary halachic guidelines and Torah values?

Which possible analysts of communal needs and programs are truly free from conflicts of interest? Are not all likely candidates invested in or employed by particular

institutions and programs?

What hope of uniformity can possibly be achieved given the conflicting values among different streams of American Orthodoxy, as well as the disparities found even within the distinct streams?

All of these factors impose a daunting barrier to the creation and analysis of a communal programmatic balance sheet. Nevertheless, the disastrous consequences of not undertaking this thoughtful approach, and the spiritual decline that will ensue if matters of significance are left to chance, necessitate that leaders overcome these challenges.

Efficiency and Transparency
When a troubled company asks its lenders to forbear repayment, or requests additional financing, the lenders typically condition their accommodations on their receiving expanded financial and operational reports identifying objectives regarding revenue, profits and operational targets, and on the borrower subsequently achieving the targets. These conditions are called “covenants.” The greater the credit crunch, the harsher the covenants, and the more demanding the lenders’ requirements of transparency and accountability. Occasionally, lenders will even require the borrower to permit a third party to monitor the company’s internal operations. By contrast, in a period of prosperity, lenders freely advance money, require minimal reporting and impose few covenants on borrowers. Similarly, in times of prosperity, donors fail to demand accountability of charities. Perhaps irresponsibly, for the past many years, most donors to charitable organizations have not required financial or operational reports or identifiable criteria of success or effectiveness.

Now, though, times have changed.

The Jewish community faces a “charity crunch,” with increased needs and dwindling dollars available to address those needs. Inevitably, donors will be forced to demand financial and operational transparency and greater detail regarding charities’ programmatic goals and achievements. Non-profit professionals will probably protest, as corporate executives do, that these demands impose an additional layer of expense and administration on an already burdened staff. Such resistance is predictable yet dismissible, given that the resulting increased accountability creates greater internal efficiency and effectiveness and forces institutions to focus on often-overlooked financial and operational adjustments.

Transparency will also eliminate various questionable practices of cash-strapped charities. Vendors will be able to assess whether the institution is a worthy customer, and employee candidates will be capable of evaluating their salary and pension risks. Perhaps most significantly, the practice of spiraling debt obligations would be disclosed to would-be lenders. Currently, too many charities are financing their annual deficits through borrowings that are repaid only through additional borrowings. With no realistic sources of ultimate repayment, these charities are perpetuating a Ponzi scheme in which the last party owed monies will be left exposed.

Rather than each donor and institution proposing guidelines for transparency and accountability, influential donors should mandate a uniform standard of reporting for all charitable institutions. Even confidential and sensitive information should be provided to at least designated community leaders for review. It is intolerable for privately “owned” charities to operate behind a veil during a charity crunch. Reports should not only disclose balance sheets and cash flow analyses, but should also address programmatic goals and achievements. Philanthropists could then allocate funds responsibly. Equally important, transparency and accountability will force charities to reconsider salaries that are often inappropriately high or embarrassingly low and to pay greater attention to expenses and operating styles. Finally, these comprehensive reports will offer important information to donors regarding appropriate charitable priorities, and allow Torah authorities to provide informed halachic guidance regarding charitable triage.

Of course, reluctant donors could take advantage of this new system. A donor could refuse to contribute to institutions that do not participate in a reporting system, and could reject a solicitation based upon reported data. The net impact on charities, however, would be negligible, if not ultimately beneficial. Donors seeking to reduce giving have ample excuses, and a good-faith donor who refuses to donate to a non-participating charity would likely redirect the charitable dollars to institutions whose reports reflect integrity and achievements. In fact, significant donors are likely to be even more generous when they observe their money being used in a responsible manner.

Institutional Consolidation
In the corporate world, when a review of the balance sheet and cash flow projections reveals that a company is troubled and unlikely to attract the financing necessary for long-term viability and growth, the board is duty-bound to explore a possible sale or merger. Occasionally, board members will irresponsibly deprive investors and lenders of a chance to recoup their losses by letting the company deteriorate to the point where a sale or merger is no longer an option. In such a situation, due to the board’s negligence, the enterprise will simply have to shut down.

Similarly, as a community, we need to seriously consider institutional mergers to reduce overhead and eliminate program duplication. The challenge, of course, is identifying the particular schools, outreach programs or social service entities to eliminate. Each organization enriches the community by offering a unique approach or addressing a specific constituency or cause. Nevertheless, the benefits of having multiple parallel institutions may need to be sacrificed so that ensuing resources can be reallocated for other more pressing purposes.

When a troubled corporation’s board chooses between a restructuring, merger, sale or liquidation, its goal is to maximize returns for lenders and shareholders. Each alternative entails personal sacrifice, and the failure to focus on the board’s duties risks liability. A charity’s board should undertake a similar analysis: community interests must trump personal needs. And donors, through the power of their support, are also duty bound to hold accountable the decision-makers of each non-profit. Donors who fail to dedicate the time and attention needed to hold charity leaders responsible are complicit in their failures.

Of course, a planned consolidation of the community’s infrastructure will be extremely painful and will undoubtedly cause discord. Tragically, however, there will be even greater suffering if consolidation is left to the vagaries of chance, or if the only institutions to survive are those that happen to have the most aggressive leaders or the most charismatic fundraisers.

Innovation and Creativity
Despite the myriad challenges the financial crisis imposes, it also creates an opportunity to reassess, rethink and improve. Frequently, a troubled company will emerge from a restructuring more vigorous and energized. So, too, in the private sector; charitable organizations can use the restructuring process as an opportunity to re-examine and improve their operations.

The Orthodox community, with its allegiance to history and tradition, is naturally averse to change. While this resistance is understandable, it often prevents the honest and objective reassessment of community institutions and their strategies and policies. Regardless of communal culture, the current financial crisis will bring about significant changes. But it is far better for leaders to harness change by preemptively introducing new approaches than to allow haphazard reactions to the economic crisis to dictate change.

Anticipating Restructuring’s Implications
A corporation considering a restructuring must anticipate unintended consequences. For example, the departure of key personnel may alienate customers or forfeit institutional memory, and closing a division could shift unaccounted-for overhead to the remaining divisions. Similarly, restructuring the infrastructure of American Orthodoxy necessitates anticipating and addressing various unintended consequences. For example, consolidations will eliminate the jobs of many dedicated community professionals, requiring job retraining, severance pay or other forms of assistance. In the same vein, when social services are cut—whether to the elderly or to the ill—alternative sources of help must be found.

The upheaval may also cause significant religious and attitudinal changes. For example, the sudden and severe financial limitations on a philanthropist may put an end to his primary mode of religious expression. Such a person will want to find alternative forms of religious expression; he may get involved in “hands-on” chesed, enhance his interpersonal relationships or put more energy into tefillah (prayer). Some young men who had planned to focus exclusively on Torah study may need to be encouraged to retain their commitment even as they are distracted by new financial responsibilities. Similarly, efforts must be made to preserve the idealism and passion of those planning careers in community service, who may discover that positions paying living wages are harder to find.

By the same token, will highly talented and committed young men and women planning careers in chinuch (Jewish education), outreach or the rabbinate forgo such plans in reaction to the pain and job losses they witness current communal professionals experiencing? Or will the reduced number of secure jobs in the private sector offset any such discouragement?

Leadership as the Key to Success
The ultimate success of every restructuring effort depends on the integrity of the initial analysis and the quality of the plan’s implementation. A restructuring’s viability rises and falls with the enterprise’s leadership. More diffuse and reactive leadership may be appropriate during periods of prosperity and tranquility. In crisis periods, however, strong and powerful centralized communal leadership is critical on both local and national levels.

Over the past many years, communal leadership in the Orthodox community has often been subject to lay disparagement and cynicism. This phenomenon may reflect the arrogance of certain influential community members who believe that their financial success is credited to their own intelligence and talent. Additionally, it has limited the influence of rabbinic leadership and discouraged lay activism. In fact, with few exceptions, recent years have witnessed lay involvement limited primarily to fundraising and political lobbying. Perhaps the economic downturn will lead to personal introspection, commencing a new era of humility accompanied by increased deference to Torah knowledge and greater respect for idealism and community activism.

For a communal restructuring plan to succeed, community members must recognize and empower the rabbinic leadership as well as the lay activists. At the same time, rabbinic leadership must assume the activist role that such responsibility demands. Often, rabbinic personalities focus on personal growth and share their wisdom and passion with only a small cadre of students or congregants. In times such as these, however, religious leaders must take on a broader communal role and the responsibilities such a role demands. No doubt fundraising, traveling and attending endless meetings are painful, and demand personal spiritual sacrifice. Moreover, assuming a more public role subjects one to the risk of criticism and attacks. However, these are the costs of leadership that need to be paid to ensure that the Orthodox community emerges strong and vibrant from the current crisis.

Mark (Moishe) Bane, a corporate restructuring attorney, works at an international law firm. He is chairman of both the OU’s Board of Governors and its Institute for Public Affairs, after having spent four years as national chairman of NCSY.