New College Out of Money: Teachers Unpaid, Not Teaching

Last week, school trustee and Craigslist cofounder Phillip Knowlton was in New York arranging a cash infusion from an undisclosed source, to be routed through a newly formed limited liability company called Friends of New College. That money would sustain the staff's health benefits, which supposedly had a Feb. 9 payment deadline. The exact nature of this transaction is unclear; by press time, Knowlton and Molina had not returned calls requesting a fuller explanation.

Molina, for his part, says the school has a new, highly qualified president waiting in the wings to turn the school around, if only the Department of Education will allow New College access to financial aid money to pay him. In the meantime, Molina says, the school will seek to sell property in order to cling to life.

New College's financial crisis exists, in its most immediate form, as the result of recent steps by the Department of Education to investigate what the school has done with previously granted federal money. Recordkeeping has been sketchy, with several unsubstantiated rumors of unaccounted-for funds. Pending investigation, the education department has frozen millions of dollars' worth of federally subsidized student loans and grants from last fall and this spring.

The school, which had an annual budget of around $15 million, has depended almost entirely on tuition payments, much of it coming from students receiving federal aid. As a result, the lack of federal dollars has all but eliminated that budget. An education department spokeswoman would not comment directly, so I don't know the nature of the apparent accounting irregularities that have caused federal officials to suspend payments. Molina told me the rumors of missing federally linked money are false. "There was a lot of concern that we have moved money around, and we weren't accounting for it," he said. "But we have done a full accounting and a full reconciliation of funds."

Beyond the issue of the frozen money, the current crisis seems more fundamentally rooted in recently resigned college president Martin Hamilton's dreams of creating a nonprofit real-estate empire. These dreams began to crumble last year, as students and teachers informed the Western Association of Colleges and Schools (WASC), which accredits New College, about allegations that Hamilton gave away grades, credit, and money to a foreign student he had befriended — accusations he strenuously denies.

Whether true or not, the claims invited scrutiny by regulators, and revealed a situation at New College even more complicated than an alleged student-administrator relationship gone awry.

For years, student tuition seems to have served in part as cash flow for a series of real-estate transactions. There exists no evidence that any people involved with the school have enriched themselves, and I have no reason to believe that. But public records seem to reveal a financial situation at New College that would take teams of accountants significant time to sort out.

My own review of information at the recorder's offices of San Francisco and elsewhere reveals that for many years the school seems to have been partly run as a tangled real estate and credit operation, in which the college acquired properties across the state and then took out loans against them, using the money and property to engage in further transactions. In 2006, the school bought a dilapidated flophouse on Fillmore, intending to turn it into a residence hall. Molina said that building is now in escrow; the sale was held up because of asbestos contamination and other permitting issues.

That purchase was part of then-president Hamilton's apparent strategy to significantly expand the school, which included buying the Roxie Theater business in 2005, but not the building. Hamilton had also lobbied for rights to acquire the former U.C. Berkeley Extension campus in the Upper Market area. Public records describe purchases, sales, loans, leases, and intramural property transfers that seem extraordinary for a small liberal arts school.

During recent months, the school appears to have tried to stay afloat. In mid-July, the school sold its interest in a piece of property near Calistoga in a transaction valued at $1.7 million. Since November, the school has borrowed at least $1 million, most from current and former trustees, using as collateral a former creamery on Valencia that it bought in 2005 for $1.5 million.

On Dec. 13, the school took out a $1 million loan secured by other New College campus buildings from Advance Holdings Participações Ltda., which I was unable to find information about at press time.

The college's seemingly intractable financial situation was recently summarized in a report from the WASC, which has suspended accreditation. "The fragile state of the financial situation leaves the College with few options to continue operations in the near and long term," the report read. "All the property is highly mortgaged, leaving little ability to sell and lease back buildings which would, in any case, be a short-term solution to the cash crisis. Continuing to borrow from individuals and bank overdrafts are a further indication of desperation to meet the basic operating obligations."

Much has been written here and elsewhere about the disastrous effects of New College's previous cultlike leadership structure, in which old friends Hamilton, Peter Gabel, and Millie Henry ran the college as if it were their own personal property. The WASC report made this analysis official, declaring that "many faculty members felt they were living in a culture of currying favor, rather than a culture of accountability with clear faculty rights and responsibilities." Both Molina and trustee Jane Swan told me that the old guard would no longer have a role running the school.