Parents Sue Trustees Over Prep School’s Shutdown
One day last September, Conserve School students were at study in a lounge.
When the students of the Conserve School in Wisconsin poured into the auditorium on a blustery morning early this year, they had no inkling of what would follow.
In a biology class, a student analyzed a leaf.
Stefan Anderson, Conserve School’s headmaster, told students that the four-year program would be shortened to one semester.
A Conserve senior, Wendy Eliot, studying. The school was built on land donated by James R. Lowenstine, a steel executive.
Conserve School covers 1,200 acres in Land O’ Lakes.
Stefan Anderson, the headmaster, told them that the trustees were essentially shutting down the prep school because of the dismal economic climate. Its four-year program would be converted to a single semester of study focused on nature and the environment.
“We thought we would hear they were cutting financial aid,” recalled Erty Seidel, a senior on the wooded campus, which is filled with wildlife and sprawls across 1,200 acres in Land O’ Lakes.
Greta Dohl, a student from Iron River, Mich., in her third year at the school, broke down and cried. “I was absolutely heartbroken,” she said of the closing.
Now students and parents are banding together and challenging the action, contending the school’s underlying financial condition does not look so dire. In fact, the school’s endowment would be the envy of many a prep school. With $181 million and 143 students, it has the equivalent of more than $1 million a student.
In a lawsuit filed in State Circuit Court in Wisconsin, the parents argue that the trustees are acting in their own interests — as officials of a separate, profit-making steel company — and want them removed from oversight of the school.
At its heart, the dispute shows how much distrust can build when a nonprofit’s trustees are one and the same as those overseeing a company. And it illustrates what can happen to a nonprofit that fails to diversify its investments.
The trustees counter that they are performing their duty and that the endowment does not have enough money to meet the school’s current needs. Furthermore, they say the school’s trust never specified that the school would have a college preparatory curriculum over four years or that the trust should diversify.
The fight threatens the legacy of James R. Lowenstine, a chief executive of the Central Steel and Wire Company, a Chicago steel company, who died in 1996. Childless himself, he envisioned a school that would provide a general education with an emphasis on nature, and donated land he had accumulated in his lifetime.
Today, the property has eight lakes, 22 miles of cross-country biking and hiking trails, and school buildings completed in 2002. Mr. Lowenstine established a trust that has been providing financial aid to about 70 percent of the school’s diverse student body.
The trust remains heavily invested in Central Steel and Wire and has a majority stake in the company. The trustees, who therefore control the steel company, wear multiple hats, as directors of Conserve School and directors and executives of Central Steel and Wire.
Some parents suggest the trustees are fearful that selling some of the stock to meet the school’s needs could jeopardize their roles at the steel company. If the trust’s stake of 59 percent fell below 50 percent, an outsider could take control of the company.
Conserve School is unusual in several ways. Most endowments aim to diversify their holdings to minimize the risk of devastation from one soured investment. The Conserve School Trust has $132 million of its $181 million endowment in Central Steel stock.
Ronald V. Kazmar, Central Wire and Steel’s chief financial officer and managing trustee for the trust, said in a telephone interview that the original trust document said the trustees did not have to diversify and recommended they not sell the stock.
Even so, the trust has substantial resources. School endowments generally pay out about 5 percent of their assets annually, a rule of thumb among charities.
In the last fiscal year, the trust distributed less than 3 percent of its assets, or $4.9 million of the school’s $8 million operating budget, according to Mr. Kazmar, with paid tuition of $30,000 a year contributing most of the rest.
The financial condition of Central Steel, meanwhile, is difficult to gauge. Mr. Kazmar said that the closely held company was valued annually by J.P. Morgan, and that those figures were not made public. The stock is thinly traded over the counter and appears to have fallen about 10 percent from its 52-week high last April.
Last year Central Steel paid a dividend of $30 a share. According to Mr. Kazmar, the company is planning to cut its dividend to $20 this year. At that level, the trust will still reap about $3.2 million in dividends. The trust could also tap its other, diversified holdings, about $48 million.
In court documents, the trustees said that the trust could provide only $4 million annually to the school, “well short of the school’s current operating needs.” That projected shortfall prompted them to seek “alternative models,” they added. The school will need about $6.2 million from the trust next year to meet its $8 million budget, Mr. Kazmar said in the interview.
The trust could sell various assets and wait out the downturn, contends William Meier, one of the parents bringing the lawsuit.
He said he sent his son to Conserve because he was gifted academically and “our public school in Whitefish Bay does not have a gifted and talented program for the high school.”
“My son fell in love with it,” he added.
In an affidavit, he testified that when he asked the headmaster why the trustees did not diversify, Mr. Anderson replied that the trustees did not want to sell below 51 percent of the holdings in the steel company “or they would lose control of the company.”
Mr. Kazmar, the managing trustee, denied the trustees had any motive other than serving the school. “There has been an economic downturn and based on our projections, it is necessary to make this change,” he said in the interview. “Our only agenda here is to keep the school going.”
Daniel L. Kurtz, a partner at the law firm Skadden, Arps, Slate, Meagher & Flom who heads its exempt organizations practice and is not involved in the case, said that in his opinion, even if the trustees were not directed to diversify their holdings, they had certain obligations.
In his view, “the trustees have to act in the best interest of the beneficiary, which is the charity,” he added. “Holding on to a stock that declines in value simply cannot be a means of fulfilling your fiduciary obligations.”
On Friday, a judge rejected the parents’ request for a temporary halt to the trustees’ plan, suggested mediation and scheduled a hearing for late April.
The downsizing at Conserve has left many teachers and students adrift. More than two dozen teachers were offered severance packages if they did not disparage the school.
Juniors have been told that they can finish their senior year. Ms. Dohl, however, has applied to college early in hopes of skipping a senior year in a school with fewer than 40 students.
“I feel that the academic program has been compromised,” she said. “The wide variety of classes is not going to be offered. The teachers will be focused on planning the semester school instead of focusing on us. The atmosphere is going to be really, really weird. We are going to look around and say, ‘Where is everybody else?’ ”
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