Trustees of Girard College, a free elementary and secondary school for disadvantaged youth in Philadelphia, have been denied a request to eliminate their residential and high school programs temporarily in order to rebuild their reserves to assure the long-term viability of their programs.  The Pennsylvania Commonwealth Court has affirmed an Orphans’ Court decision denying the request.  (Estate of Stephen Girard, No. 2254 C.D. 2014, 1/21/16.) 

The school was opened in 1848 pursuant to a bequest left to the City of Philadelphia in the 1830’s will of Stephen Girard, shipping magnate, merchant and banker, who was believed to be one of the richest men in America at the time of his death.  He left the bulk of his estate to establish a school for at least 300 “poor male white orphan children” who could live on the campus until they were ready to move on to productive lives.  The school was racially integrated in 1968 and the first girl was admitted in 1984.  The school is run by the Board of City Trusts, which was created to hold charitable funds given to the City.

Following the Recession of 2008-09, the school faced significant financial issues.  In 2007, the school had lost about $3.3 million on its operations.  The school has traditionally had income from three major sources: coal and coal royalties, rental income from a substantial portfolio of real estate, and income from investment assets.  Income was declining from all sources, and its reserve fund shrank from $330 million in 2007 to less than $200 million in 2011.

The school established a strategic planning committee that retained outside experts and considered at least 13 options for keeping the residential program.  But the trustees concluded that the best course would be to temporarily suspend the high school program and drop the residential aspect for grades 1-8 in order to grow back the reserves to assure financial viability.  In 2013, the school asked the Orphans’ Court to approve the changes, claiming that the reserve funds would be exhausted within 25 years if it didn’t make the changes.  It said its financial projections did not include the cost of physical plant renovations that were estimated at $3.8 million for “deficiency repairs” and $110 million for complete renovation.

Although the state Attorney General supported the request, the Orphans’ Court turned it down, without prejudice to bring the case again if necessary.  The Commonwealth Court, saying that its scope of review of a decree in equity was “particularly limited” and that the findings of the Orphans’ Court could be reversed only for a clear abuse of discretion, has found no abuse of discretion and affirmed.

On appeal, the school argued that each of the three major findings of the Orphans’ Court was wrong.  The Orphans’ Court had held that the request was not one for “administrative deviation,” did not qualify for cy pres relief, and any change in circumstances were actually anticipated by Stephen Girard.

When Pennsylvania adopted the Uniform Trust Code in 2006, it provided that a court could “modify an administrative provision of a charitable trust to the extent necessary to preserve the trust.”  It did not define an “administrative” provision, but a prior case involving the Barnes Foundation had defined an administrative provision as one involving the details of administration which the settlor prescribed to secure the principal advantages of the trust for the beneficiaries.  The Commonwealth Court agreed with the Orphans’ Court that the references to maintenance, residence and lodging in Girard’s will showed his intent to provide a residential program as an integral part of the school and were “dispositive,” not administrative, provisions.

The codification of the cy pres standard provides that “if a particular charitable purpose becomes unlawful, impracticable or wasteful” a court may apply cy pres “to fulfill as nearly as possible the settlor’s charitable intention.”  Because the economic fortunes of the school had turned around by the time the case got to court and it had run a surplus of $3.5 million in 2013 and projected a surplus of about $3 million in 2014 after payments into a sinking fund to pay off outstanding debt, the Orphans’ Court had found that operating the residential and high school programs was not currently impracticable.

The school argued that the Orphans’ Court’s focus on “this year” and “coming years” was “myopic” and the program was clearly impracticable if the financial issues were not addressed promptly.  On the appeal, the Attorney General supported the Orphans’ Court, saying that the court did not have to grant a cy pres petition “preemptively” and that there is not necessarily such a thing as “temporary” cy pres.

The Commonwealth Court found “no error” in the Orphans’ Court’s determination that the residential and high school programs were “important parts” of Girard’s gift, and said that it was “well within” the court’s discretion to give the near-term financial projections greater weight than “the dire long-term predictions offered by the Board.”

Finally, the school challenged the Orphans’ Court’s finding that Girard had actually anticipated the fluctuation in funding that might be available for the school.  (Many common law cases require an “unanticipated” change in circumstances in order to invoke the cy pres doctrine although the current Pennsylvania law does not require it.)  The Orphans’ Court had pointed out that Girard’s will called for the admission of new students each year to the extent that the income from the trust fund could sustain them.  It also noted that enrollment had fluctuated widely over the years on the basis of available income.  The Commonwealth Court found no error in the finding.

YOU NEED TO KNOW

The Commonwealth Court “commended” the trustees for beginning to “confront the myriad of financial, educational and institutional challenges currently facing” the school but essentially told them to go back to the drawing board and work within the essential residential program developed almost 200 years ago.  The Court’s view seems to be that there is latitude in the number of students in the program, but at least at this point, a residential program is not impracticable and cannot be eliminated. 

The Court itself did not seem to deal with the concept of temporary cy pres.  But it does undercut the claim that a program is impracticable today, but won’t be in a few years when there is more money available.