Rainbows United restructuring after bankruptcy is paying off

03/10/2014 11:59 AM

03/11/2014 5:29 AM

It was Pajama Day at Rainbows United.

Some of the kids were having a Dr. Seuss story read to them. Groups of toddlers were taking rides in a wagon. Other toddlers were making shapes out of Play-Doh.

All of this was happening at a Rainbows United facility near K-96 and Oliver one afternoon last week, four and a half years after it appeared unlikely that kids would be doing anything at Rainbows United ever again.

The 41-year old organization had been forced to declare Chapter 11 bankruptcy in July 2009 and nearly shut its doors for good.

But recently, Rainbows was able to pay off its remaining debt to the Internal Revenue Service 16 months ahead of schedule, offer creditors early payout of an eight-year plan, consolidate its remaining debt and a building loan into a 15-year mortgage, and reduce its monthly debt payments from $57,500 to $22,000.

It also has been operating with an efficiency and transparency it didn’t have before the bankruptcy, according to its president and board members.

“Four and a half years ago, we were the poster child for what can go wrong in a nonprofit,” said Steve Cox, a Rainbows board member who helped lead the drive to pull the organization out of bankruptcy. “Quite honestly, now we are an example of how a nonprofit can function when things are going well.”

By restructuring its debt and paying off the IRS early, Rainbows is able to focus on its mission of serving special-needs children and their families, according to staff and board members.

“It’s the last step in feeling we’re back on track,” Cox said. “And to do this at a time when government funding is shrinking, it took an awful lot of support from the community and a lot of work on the part of the board. It’s just amazing how everybody worked together.”

“It only happened because the mission was pure and the quality of service was good and people wanted us to succeed,” Cox said. “We didn’t have anyone against us.”

Rainbows’ problems came to light in 2009 with the unexpected resignation of its chief financial officer. Funding sources had tightened as federal, state and county budgets decreased, and the costs of its programs outpaced its revenue.

Funds were shifted within accounts to pay bills, and the organization stopped paying payroll taxes. Ultimately, it couldn’t meet its payroll. Records were falsified and the board was kept in the dark.

“It was a perfect storm,” said Deb Voth, Rainbows president, “and a perfect rainbow has come out of it.”

As part of its restructuring plan, Rainbows sold two of its buildings, including its downtown office at 340 S. Broadway, terminated leases on other offices it had been renting, and consolidated operations at its Kids’ Cove facility at 2258 N. Lakeway Circle and its Kids’ Point facility at K-96 and Oliver.

It reduced staff by more than 45 percent, cutting the number of employees from more than 400 to less than 250. Rainbows also fired its president and elected Voth, its chief operating officer, to the post.

When Rainbows went into bankruptcy, an auditing firm handed it a 27-page document listing suggested changes. The document even included a table of contents, said Hale Ritchie, a retired businessman who became Rainbows’ chief restructuring officer. That document has been trimmed to two pages, he said.

Ritchie, whose family helped Linda Weir-Enegren start the program 41 years ago, said he doubted Rainbows could be saved when he started work on the problems. He and Cox give credit to Emprise Bank and Bank SNB for helping it refinance its debt and to Voth and the staff for improving its operations and creating a culture of cooperation and transparency with the board.

Board members now serve on committees headed by staffers. Rainbows also has pulled in experts from the community to serve on committees.

“We had to run the business better,” Ritchie said. “The staff has done a great job keeping the business in the black. Before the bankruptcy, they were losing more than $1 million a year, but not telling the board that. The board was being given false information. Now we’re in the black and our audits are up to date.”

Today, Rainbows serves 4,400 children in Sedgwick and Butler counties, more than at any previous time. It serves children primarily in homes, day care facilities and other off-site locations.

The main loss in service after the bankruptcy was in day care for children ages 3 to 5 with special needs, which Rainbows provided free with therapy. Ritchie said the organization has a long-term goal of restoring that service.

Rainbows’ budget, formerly just under $14 million, is a little more than $8 million, Voth said. Of that, 40 percent comes from federal and state sources, 23 percent from unified school districts, 17 percent from grants and donations, and 6 percent from Sedgwick and Butler counties.

Rainbows still needs to raise $800,000 this year to continue to provide services, Voth said. It plans to do that through a fundraising drive it started last year called “The Little Things Campaign,” as well as through annual events like Fashion Passion, a 5K race in Augusta, and the Blarney Breakfast on St. Patrick’s Day.

Rainbows owes a little under $2 million on the mortgage for its building on North Oliver.

“We still have debt, there’s no question about that,” Ritchie said, “but it’s a manageable debt now.”

Voth said the community support for Rainbows was overwhelming.

“When you get in a spot like that, people can run, and nobody did,” she said. “They risked something, too, to stand by us.”

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