By Steven Rosenfeld covers national political issues for AlterNet. Originally published at Alternet.
As the Trump administration plans to redirect taxpayer billions to privatize K-12 education, a scholarly article by some of the nation’s leading investigators of charter school rip-offs has highlighted how their business model is prone to fiscal self-dealing.
The article by Preston C. Green, Bruce D. Baker and Joseph O. Oluwole has the dense title, “Are Charter Schools the Second Coming of Enron?: An Examination of the Gatekeepers That Protect Against Dangerous Related-Party Transactions in the Charter School Sector?” But its analysis is striking, comparing corporate management practices at five large schools to the financial shell game that occurred at Enron, the Texas-based energy conglomerate that imploded a dozen years ago.
On the surface, Enron was in the energy business. But behind closed doors, it was engaged in an array of dubious investments and transactions that helped its top executives amass wealth. The charter schools cited in their report similarly present a public face of being alternative public schools. But their founders also used an array of financial tactics, especially involving school real estate deals, to become rich by diverting millions from their classrooms.
Nationwide, 43 states and the District of Columbia have 6,800 charters serving 2.9 million students. They comprise 6 percent of K-12 public school enrollment, which has increased six-fold in the last 15 years. When states approved the first charters in the 1990s, the idea was to nurture locally accountable experimental schools. However, since then a K-12 privatization industry has emerged that is dominated by companies seeking to create regional or national brands, akin to any other corporate franchise. These larger charter operations tend to have non-profit and for-profit arms, which can mask an array of complicated financial relationships.
The charter industry’s largest operations often are run by what’s called educational management organizations, EMOs, which “now control 35-to-40 percent of the industry with an estimated 45 percent of charter students,” the scholars said. These sophisticated operations can attract private investors because they can use their status as schools to get large tax breaks, which, in turn, are applied to a range of profit-making ventures that have nothing to do with educating under-served communities.
“Charter schools attract investors because of the potential for new revenue streams,” the authors said. “For instance, the New Market Tax Credits (NMTC) program provides investors the opportunity to make profits from charter-school real estate transactions. Enacted as a component of the Community Relief Tax Credit Act of 2000, the NMTC was designed to encourage investment in low-income communities. The NMTC accomplishes this goal by providing investors in a community development entity (CDE) a 39% tax credit over a seven-year period.”
But the biggest way to grab seven-figure sums in the privatized education sphere was through shady real estate transactions, they said, saying their for-profit arms can “obtain revenue from charter schools through lease payments for the use of the facilities.” The authors them gave five stunning examples, where the school’s founders could not stop themselves from grabbing millions.
1. Imagine Schools. Imagine Schools is a nonprofit EMO that operates 63 charter school campuses enrolling more than 33,000 students in 11 states and the District of Columbia, they said.
“Imagine Schools uses real estate investment trusts (REITs) and triple net leases for its real estate deals. A REIT is a company ‘that owns and manages property and is required to distribute 90 percent of its income to investors,’” they said. “A triple net lease is a lease agreement whereby the lessee is responsible for rent fees as well as related costs, including taxes, insurance, and facilities maintenance. Thus, triple net leases can be especially costly for charter schools and put a great deal of stress on annual operating expenses.”
They then stated the giant taxpayer rip-off in dry academic terms.
“The rent of charter schools operated by Imagine Schools can be exorbitant,” the authors said. “Many charter schools spend around 14% of their public funding on building rent. By contrast, charter schools run by Imagine Schools spend up to an excessive 40% of their public funding on rent, creating a tight budget for educational necessities, such as textbooks. Thus, these triple net leases can even be more costly to the charter schools in the long run than direct mortgages.”
In other words, 40 percent was stripped off the top before a penny went into classrooms.
2. Ivy Academy. Ivy Academia is a K-12 school with 1,000-plus students in the Los Angeles area founded by Yevgeny Selivanov.
“In April 2013, a California jury convicted Selivanov and his wife and co-founder, Tatyana Berkovich, of felonies and misdemeanors related to their actions as founders,” they wrote.
He was sentenced to five years in prison for an elaborate bait and switch, as explain: “Selivanov and Berkovich were also co-owners of a private preschool, Academy Just for Kids (AJFK), which shared a campus with the charter school. In 2004, AJFK entered into a sublease for that campus at a monthly rent of $18,390. AJFK then assigned the sublease to Alternative, the parent company of Ivy Academia. Alternative assumed responsibility for the monthly rent payments. In 2007, AJFK and Alternative entered into another agreement, which increased the monthly rent from $18,370 to $43,870, even though: (1) the lower amount was the fair market value; (2) the lower rent was valid until 2014; and (3) the original lease prohibited rents from being increased by more than five percent annually.”
Apparently all that wasn’t greedy enough, because these charter operators did what many do—they got their board to rubberstamp and backdate that rent increase.
The academics put it this way: “Selivanov and Berkovich did not present the rent increase to Alternative’s board until October 2008. The board not only approved the rent increase, but it also made the rate effective as of July 1, 2007. As a result, Alternative paid a net rent increase of nearly $238,000.”
3. American Indian Model Charter Schools. The AIMCS is two middle schools and a high school near Oakland, California, with more than 1,100 students. In December 2011, a state oversight agency, California’s Fiscal Crisis Assistance and Management Team (FCMAT), was asked by the county board of education to audit the schools after multiple allegations of fiscal chicanery.
“The agency found that from 2007 to 2011, [Superintendent Ben] Chavis and his wife had received almost $3.8 million in payments from school accounts,” the academics wrote. “Many of these payments were linked to related-party transactions that were, indeed, in violation of the state’s conflict of interest laws.”
The way this worked was a classic example of self-dealing. The charter industry likes to say that it needs to be freed from state regulation so that it can innovate for students. Here the innovation was around shifting taxpayer money into personal accounts. The article cited one example from FCMAT’s audit.
“One transaction involved the Stanford Academic Institute of Learning Summer Mathematics Initiative (SAIL), a privately operated summer program owned by Chavis and a former board member,” they wrote. “SAIL charged the charter schools $500 per student. From the 2009-10 fiscal year through 2011, the charter schools paid SAIL $355,000. FCMAT found that these students were required to attend SAIL, which was in violation of state law.”
And that’s not all. “FCMAT found that AIMS schools paid Chavis’ companies more than $1.5 million for construction improvements,” they said. “Many of these transactions occurred without formal contracts, competitive bidding, or authorization from the charter schools’ governing board.”
4. Michigan’s Grand Traverse Academy. This school, founded by Steven Ingersoll, has 1,300 students from pre-K to 12th grade. This showcased another flavor of extreme self-dealing, where the founder created an EMO that was prepaid a lump sum at the start of the school year. Most of this money went into his pocket until a state auditor discovered this scheme.
“Because of concerns with GTA’s prepayment practices, the [state] charter school’s authorizer requested that a new auditor review the charter school’s books,” the article said. “In 2013, the new auditor found that the charter school had advanced Ingersoll’s management company more than $2.3 million in management fees. That same year, an attorney for GTA sent Ingersoll a demand letter claiming that he owed $3.5 million to the school. Ingersoll tried to repay the debt, but when he fell short by $1.6 million, the board forgave the remaining debt.”
That sad history then repeated itself, the academics said. “Ingersoll sought to repay GTA by taking out a $1.8 million line of credit that he received from a local bank. Ingersoll claimed that he was using that money to convert a church to house another charter school that he had founded. However, he diverted $934,000 of this line of credit into his personal bank account, using some of that money to repay the debt that he owed GTA. In 2015, Ingersoll was convicted of federal tax evasion charges in relation to the church renovation scheme. In 2016, he was sentenced to 41 months in prison.”
5. Pennsylvania Cyber Charter School. This scandal shows that charters don’t even need real property and buildings to bilk public funds. PA Cyber is a virtual, or online, school, which, at its peak, had 11,000 students across the state. Nicholas Trombetta, the founder and former CEO of PA Cyber, also created other firms that did business with PA Cyber. The scholars said one was “National Network of Digital Schools (NNDS), an EMO that provided curriculum and management services to the charter school.”
“An audit of PA Cyber performed by the state auditor general’s office revealed that the charter school paid NNDS more than $153 million from 2011 to 2014, which was almost half of the school’s annual expenditures,” the scholars continued.” In August 2016, Trombetta pleaded guilty to federal tax fraud charges. In his plea,
Trombetta admitted that he and others had transferred $8 million from PA Cyber to other companies controlled by Trombetta, and filed false tax returns to make it seem as though the conspirators received the money, when, in fact, the money went to Trombetta.”
Not Exceptions, But Warning Signs
The scholars said these were not exceptions but red flags in an industry whose business models encouraged a range of self-dealing. The K-12 privatization industry is poised to exponentially expand under the Trump administration as the White House is seeking to shift billions into charters and vouchers, where public funds pay for religious and home schooling. As they wrote:
“One might be tempted to conclude that the examples provided in the prior subpart are mere anecdotes, and that there is thus no cause for concern that unreasonable related-party transactions are widespread. However, it is important to keep in mind that two of the EMOs profiled in this subpart alone, Imagine Schools and PA Cyber, educate a combined 42,000 students. Another industry giant, K12 Inc., has been accused of similar transgressions.
This for-profit EMO is the largest operator of virtual schools in the country. In 2010-11, K12 Inc. enrolled 65,000 students in 48 virtual schools. An exposé of the California Virtual Academies, 10 online schools affiliated with K12 Inc., found that the EMO ‘effectively controls the schools by providing them with all academic services.’ According to accounting experts who analyzed the management services agreements, it was ‘tough to tell where the nonprofit ends and where the company begins.’”
“Tough to tell” where the non-profit and for-profit worlds blur is an apt warning for the coming wave of K-12 privatization under Trump. But what’s clear and not blurry is that these large and ambitious K-12 franchises are not always about educating kids. They’re about getting rich off taxpayers and calling that public education.
I will add Chicago’s UNO, with its many financial irregularities:
My state senator, and Hillary Clinton delegate. It’s as if the Democratic Party elites just can’t control themselves. Part of the latest battle over charter schools (and an elected school board) in Chicago.
Discovering Steans on the ballot during the primary election / presidential race was one of the reasons I didn’t vote for Clinton in the general.
Thank you for continuing to highlight this. The one that really gets me are the “virtual” charter schools where one assumes the children virtually, as opposed to actually, learn.
These were touted in Maine as being good for those with disabilities (maybe, but that an extremely small percentage of students) and athletes who don’t have the time to attend classes like other students. Somehow no mention was made that maybe athletes should just cut down on athletics and make sure they get to class.
The grift combined with lack of success does not inspire confidence that, to paraphrase President W, our children is learning what they need to be.
Meanwhile our public schools do not adopt whatever successful charter school programs there might be as was the intention, but continue to try to reinvent the wheel with nonsense like “proficiency based learning”, which merely changes the definitions of some words and uses confusing insider-jargon acronyms to pretend it’s a great new academic program. But even early elementary schoolers can use an iPad now so little Susie must have learned something, even if it’s just how to press the icons on the iPad rather than actual grammar or arithmetic.
As a remedy, I’ll continue to make sure my house is well stocked with books for the kid.
Charter schools were always a “made for scammers” dream: no clear deliverables capable of objective measurement makes it easy to sell the dream – until the kids get old enough for people to realize that the charter schools haven’t imparted the necessary skills for the kids to function in today’s society. By then, of course, the scammers have long since retired to a jurisdiction without extradition…
Are the public schools over-regulated and subject to silly “improvements” – yes, and it’s been going on for a very long time. The problem is that although we need a method of testing progress, it’s expensive to do such testing well – so cheap multiple-choice tests are used.
As for the “modern teaching methods”, parents have been complaining about that for a very long time:
Consider Tom Lehrer’s New Math from 1965
The problem I see with public schools is that for the most part well-meaning administrators didn’t get Garrison Keillor’s joke about all the children in Lake Woebegone being above average and take it instead as a goal to achieve. Clearly by definition an impossibility, but as long as this scam of paying administrators six figure salaries to show otherwise goes on, then they’re going to keep coming up with “improvements” to justify the money they’re getting.
Not everyone’s kid is going to be a whiz at every subject. To quote from the venerable fount of wisdom that is Caddyshack regarding the opportunities for those who aren’t college material, “Well the world needs ditch diggers too.” ** Where is disagree with the conventional economic wisdom is in the renumeration for the world’s ditch diggers. I think they ought to be paid well for it – it would seem to me that their work is at least as valuable to society as that of a derivatives trader. That would take a lot of pressure off public schools to make sure everyone was an A student, and quite possibly make public education cheaper as the need for so many administrators to achieve that impossible goal was seen to be unnecessary. It also might make the perceived need for charters go away too.
** Don’t mean to come off as snobby here – I’ve dug my share of ditches (literally) and speak as someone who did go to college but realized that I wasn’t going to be a genius in the fields I might have preferred to continue in.
Sad, galling item in today’s NYPost,
Any so-called ‘educator’ who thinks kids don’t benefit from books should be canned immediately.
This fetishism of shiny new gadgets and tests – grift-streams for crony suppliers –
is gutting a generation of kids.
I feel sorry and angry these kids are getting robbed of an education.
““But 14-year-old Anthony Galindo is disappointed that books are considered obsolete.
“It’s really strange. Last year we didn’t have enough textbooks so we had to share. Now we don’t have any at all,” he said, adding: “I liked being able to take them home to study . . . In my government class, my teacher gives hand-written assignments.”
The dearth of books has not helped Life Sciences’ academic performance. Last year, 5 percent of its 6th- to 8th-graders passed state math exams and 9 percent passed English — far below the city average. At the high-school level, 82 percent graduated, but only 26 percent were deemed college-ready.
Principal Swanson did not return messages. Department of Education spokesman Michael Aciman said the chucked volumes were “outdated and no longer aligned to the school’s current curriculum or New York State Learning Standards,” adding that students “have access to current, updated” books.
A school staffer called the DOE’s statement “a blatant lie.”
Thanks for the link, infuriating as it is.
Maybe I’m an outlier, but having been educated by teachers using books, I don’t believe that watching videos on the internet is a substitute in any way. At work I’m currently trying to learn some new excel tricks with internet videos and it is extremely tedious. I find myself rewatching the same section of a video over and over to try to learn what I need when it would be so much easier to simply ask a question to a human being.
5 Examples when Charter School Founders Used Shady Real Estate Deals to Shamelessly Enrich Themselves
Timely article…. “large tax breaks”… “a range of profit-making ventures that have nothing to do with educating”… “the opportunity to make profits from charter-school real estate transactions”… etc.
“The scholars said these were not exceptions but red flags in an industry whose business models encouraged a range of self-dealing. The K-12 privatization industry is poised to exponentially expand under the Trump administration as the White House is seeking to shift billions into charters and vouchers,”…
More examples of the broader failure and scams endemic to the “Public-Private Partnerships” model so beloved and touted by Wall Street, a former Fed chairman, individual and corporate financial beneficiaries, and their politicians. As (again) shown by these few examples, this model essentially removes formerly public entities from public oversight and control while enabling scammers access to the public purse, all under the guise of implementing improvements and reducing costs.
The damage to children and our society in instances such as those outlined above makes them particularly egregious in my view.
Diagnosis rendered. Didn’t even need AI to figure it out. “Follow the money,” as best “we” can, to watch what the neos do, judicially study it, while they move on, 24-7, to create those new realities that we can then judiciously study, as we will…
One asks what the remedy for the illness might be.. if there is one, not just continued metastasis of the disease…
Excellent question, JT, and one that deserves thought across a range of disciplines, particularly as our values as a society play a role. Reminds me of the Powell Memorandum of August 1971 which I feel was foundational to what has subsequently occurred. Impressive planning, exercise and leverage of the tools of power, network, and organizational discipline. But what has transpired is ultimately unsustainable IMO, and accordingly will not be sustained.
As this post suggests, they devalue and ignore the long-term benefits of a well-informed, educated and healthy citizenry. Together with honoring public input and healthy disagreement as part of civil discourse, I believe these are prerequisites to longer term outcomes consistent with a sustainable system.
… But go ahead… continue to “”privatize” public assets and services, loot, concentrate wealth, and even change the inheritance tax. See where it leads you.
“Ohio’s attempts to recover about $20 million in state tax funding from eight online charter schools has stalled for more than six months while a much larger battle over more than $60 million from e-school giant ECOT lingers in appeals court.
The year-long fight between the Ohio Department of Education and ECOT, the Electronic Classroom of Tomorrow, has also delayed the state legislature from sorting out how to avoid e-school funding controversies in the future…
…Despite many agreeing that Ohio needs to overhaul its funding of online schools, no one has suggested a single bill, held a single hearing or publicly called for any research.
Since nothing is on the table, there will likely be no action before the legislature goes on break at the end of June. That means nothing will be in place in time for the 2017-18 school year.”
Only when there is a true free market for schools unburdened by government regulation and artificial monopolies on things like teachers and learning materials will we have the best educational system in the world
Crony capitalist charter schools are not free market.
And then only the children of the rich will be educated, as was the case when what you promote actually existed.
Yup. Some more of that “we have the best education, healthcare, food availability, whatever” without the proper ending of, “for those that can afford it.”
The problem is the same as with the traditional public schools, and anything tainted by politics, really: cronyism, which can best be addressed not by expanding public oversight–which means yet more politically-driven rules and favoritism–but by depoliticizing education. Some state should take advantage of the current chaos to try this experiment: divest the public schools, give parents X dollars to send their kids to any school they like or homeschool, and get the government out of the business of running schools, awarding charter contracts, and setting standards. Some parents, in some communities, might choose to continue to send their kids to community schools or former charters. Many would undoubtedly turn to religious schools. Others might try new options squeezed out of the current marketplace by cronyism. Diversity and choices–what could possibly be more American? And mercifully, the buck-passing and blame game would have to stop: the responsibility would be firmly on the parents, not the pols or their pals. One can dream, anyway.
Warren Buffett says gambling is a “tax on ignorance.” Could the widespread promotion of ignorance in the U.S. be to benefit the likes of Trump and his casinos?
Meanwhile, charter schools are part of a trinity of educational “reforms” touted as the way to go. In addition to charters, merit pay and frequent testing are supposed to improve educational outcomes. Michelle Rhee’s (and Eli Broad’s) despicable organization, the ironically named “Students First” promoted these, even though no science supports their claims.
Even the propaganda film Waiting for Superman promotes this stuff, pointing out that the Finnish schools are an example of what “super” teachers can do. Of course the film neglects to mention that Finnish teachers are unionized, tenured and well paid.
But if charters, merit pay and testing don’t at least correlate with better educational outcomes, what does? Answer: Childhood poverty. In Finland, 2% of the kids are poor; in the U.S. it’s 23%.
So…could these “reforms”–aside from their grifting–actually be a way to misdirect public attention away from income inequality?