How the Greediest Charter School Operators Loot Taxpayers Via Real Estate Deals

By Jennifer Berkshire, who chronicles the end of public education at Have You Heard blog and is the co-host of a biweekly podcast on education in the time of Trump. Originally published at Have You Heard; transcription by Alternet

An interview with the University of Connecticut’s Preston Green, co-author of 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, which was published in the Indians Law Journal

Jennifer Berkshire: Our Secretary of Education is visiting a Florida charter school that is best known for being started by rap-u-preneur, Pitbull. But a lesser known true fact is that the school’s powerful and politically connected management company, Academica, ran afoul of the feds for a little… something called “related-party transactions.” What is a related-party transaction? And why do I have the feeling that Betsy DeVos didn’t drop by to, um, continue the investigation?

Preston Green: Related-party transactions occur when you have two entities that have a pre-existing relationship. For example, if two entities have common management, or in the charter sector context, you could have an EMO [Educational Management Organization] that also has a real estate arm, which then leases property back to the charter school at a greatly inflated rate. In the case of Academica, which is the management company that runs the school Secretary DeVos visited, it’s “all of the above.” You see different entities sharing the same board of directors, conflicts of interest and questionable real estate dealings, including charter schools paying rents that are well above the market rate to companies that Academica owns.

Berkshire: Betsy DeVos is a huge fan of charter schools because they remove the shackles of oversight and regulation that have kept our teachers in receive mode for too long and caused the nation’s students to descend to the bottom of the PISA pile. But as you’ve been warning, “shackle removal” in other sectors has led to, oh I don’t know, the subprime mortgage crisis and Enron.

Green: That’s right. My recent research has involved looking at privatization in other contexts, and trying to determine whether the issues and problems you see in these other contexts could impact charter schools. I explored the issue of whether a charter school “bubble” is emerging, akin to what we saw in the lead up to the housing crisis. My most recent paper, with co-authors Bruce Baker and Joseph Oluwole, looks at similarities between what’s happening with charter schools today and what happened in the energy sector. Charter schools were to be freed from the shackles of rules that applied to public schools and those rules were regulations.

The thinking was that by removing those regulations, the industry could tap into innovation. And that’s the same language, by the way, that we saw in the subprime mortgage crisis and that we saw in relation to Enron. By removing all of the shackles that would prevent innovation in the business sector, we would harness that innovation. But instead we enabled private entities with nefarious purposes to take advantage of that. I’m not saying that all charter schools are nefarious, but when you remove the regulations, there may just be too much incentive, and too much temptation for some.

Berkshire: In the past few months, the feds raided the offices of the Los Angeles charter network, Celerity, and recently, Ben Chavis, the head of a charter network in Oakland, was sentenced to prison for money laundering, profiteering and mail fraud. These stories are filled with the kinds of “Enron-ish” behaviors that you identified in your paper. But I noticed another common theme too—charter advocates who seem to imply that a little criminality is OK if the school generates results. The problem here is that they somehow think that the fraud is decoupled from the students who are being served.

Green: The problem here is that they somehow think that the fraud is decoupled from the students who are being served. Take Imagine Schools, for example. Imagine Schools had a very sophisticated transaction system that led to facilities being rented to charter schools. It turns out that a number of these schools were paying 40% of their budgets for rent. Well if a school is paying 40% of its budget for rent, it’s not spending money on education-related expenses. The schools run by Academica, which runs the charter Betsy DeVos visited, spend 20% of their budgets on rent. That has a major impact on the ability of a school to provide an education.

We also know that these schools are expanding in communities where we often argue kids need more resources if we’re going to provide them with the same level of education that kids get in more affluent neighborhoods. So it stands to reason that a lot of this fraud is going to occur in low-income minority communities, and because of that you could end up with schools that don’t have the resources necessary to educate their students. They’re going to be impacted in a disproportionate way. This is exactly what the NAACP was concerned about, by the way, when it called for its moratorium on charter growth last year, that there need to be gatekeeping and protections in place to ensure that communities of color and low income communities have charter schools that are devoting their resources to educating their children.

Berkshire: Whenever I post something related to charter school fraud, I get the same response: There’s fraud in public schools too. Why don’t you go on a crusade against that?

Green: You’ll often hear people say that, and they’re correct. But there is a type of fraud that is unique to the charter school sector. Because of the education management organization relationship, there is this sort of Enron-set up in which these EMOs can then have related party transactions with other companies and work against the interests of the charter schools that they’re serving. This is important because EMOs are primarily in the charter school sector. You don’t see them in traditional public schools. The creation of EMOs that provide educational services to charter schools creates what we call an agency issue. There is an inherent conflict between the charter school boards that want to ensure that charters are operating legally and fiscally responsibility and EMOs, either for profit or nonprofit, that want to make money or cut their expenses.

Because of this inherent conflict, you’ve got to have gatekeepers who are aware of this possibility. In 2016, the U.S. Office of the Inspector General released a report and noted that a primary flaw of the U.S. Department of Education was that it treated charter schools and traditional public schools the same. The OIG said that this is a major problem, that you cannot treat them the same because of the EMO relationships with charter schools. We need to understand how this type of fraud works in order to better design gatekeeping mechanisms because it ties into everything. It ties into auditing, it ties into examination of the contracts at the charter school authorizer level.

Berkshire: You end your paper with a call to strengthen the oversight role of “gatekeepers” so as to prevent the kind of fraud and conflicts of interest by charter management organization like Academica or Imagine or Celerity. But I don’t have to tell you that “gates,” much like “shackles” are so yesteryear. Meanwhile, you’re seeing the entities whose job it is to keep an eye out for fraud wither away due to budget cuts, resulting in part from charter school expansion.

Green: This is a big problem, especially as fraud and mismanagement become more and more complex. We need to have gatekeepers that have a certain level of knowledge and sophistication to be able to respond to fraudulent practices. In the case of Celerity, for example, the education management organization has been shifting money around between the EMO and other related parties. But the governor vetoed a bill that would have called for greater controls over conflict of interest. So California may be setting itself up for more related-party problems, especially as charter schools continue to expand and you see the district having to cut back on its oversight role due to financial strains.

If the school districts don’t have the capacity to ferret out fraud and they’re not able to work with other gatekeepers, I think we’re laying the groundwork for more problems. The case of Ben Chavis, the head of the American Indian Model Schools in Oakland who might be headed to jail, is actually an oversight success story. It shows how a state agency with discretionary authority, in this case the state’s Fiscal Crisis Assistance and Management Team (FCMAT), can reveal fraudulent related-party transactions. The local county board of education asked FCMAT to conduct an extraordinary audit of the schools because of multiple allegations of inappropriate related-party transactions, including construction deals and a private summer program paid for by the charter school.

It’s definitely concerning that we just don’t remember the recent past and how the problems that occurred at Enron are now appearing in the charter school sector. You even see some of the same people who were involved in Enron then showing up in subprime and now in charter schools. That should tell you something.

Berkshire: The gentlemen who brought us Enron came to be known as “the smartest guys in the room.” I think of education reform as another “space” in which the “smartest guys” hold inordinate sway, and yet they seem to have learned nothing at all from the dizzying downfall(s) of their counterparts in other sectors.

Green: That is very true. It was somewhat disconcerting to see as we did this research that we went through this fifteen years before and yet fundamental lessons appear to have gone unlearned. It’s definitely concerning that we just don’t remember the recent past and how the problems that occurred at Enron are now appearing in the charter school sector. You even see some of the same people who were involved in Enron then showing up in subprime and now in charter schools. That should tell you something.

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  1. Larry

    It makes sense that DeVos would love a model of grifters running education of the public given that a good deal of her fortune is derived from the fraudulent Amway company. While the interview is right to raise the specter of past crises that resulted from runaway capitalism, I think the charter school story is more akin to the out of control assumption that outsourcing can solve all the public sectors perceived performance problems. Outsourcing is really about undermining labor and enriching selected political favorites, which is of course why the D.C. area is one of the wealthiest in the country. Private interests just tap into the the vast public streams of money to outright steal it while undermining public services at the same time. It’s ultimately a very effective form of class warfare to make sure that the educated middle class continues to shrink and reduce any political challenge to elite looting.

    1. Joe

      Very succinct Larry. You get right to the heart of the matter. While I appreciate the work of folks like Jennifer Berkshire, it always rankles me that the framework of pieces like this seem to accept the basic framework of of privatization-uber-alles.

      There are no lessons to be learned from Enron when it comes to the corporate takeover of public education. The actors (DeVos, Academica, etc) certainly aren’t interested in lessons, except maybe how to better cover their tracks. Same for public officials. The elected ones toeing the corporate line are in office because they’re toeing the corporate line; what lessons are they going to learn? Pretty much any talk of privatization, or public-private partnership, or market-based solutions to public policy, represents the basically fraudulent intellectual vanguard of the monied interests carving out a larger spot at the public trough.

      1. Clearpoint

        Very well said Joe. We don’t need to know how to audit these entities. We already know enough about them to know that for profit charter schools don’t work and can’t work. There are only two ways of maximizing profit – increase revenues, i.e. extract more from the taxpayers, or decrease costs, i.e. reduce the services provided to the students. The race to the bottom is predictable, as taxpayers resist tax increases, and kids won’t complain if less is demanded of them than in a good system of education, plus parents are not in position to adequately judge the benefits of their children’s education timely enough to make a difference. Reducing costs is easy, which is what attracts the profiteers. The huge cost savings from breaking away from the teachers union are easily pilfered by the profiteers; inflating rents paid to related parties being only one of the ways.

  2. Sandler

    Wow I’m glad the real estate side of this is being covered. When I worked in commercial real estate I evaluated a charter school deal. Everyone loved that the revenues were guaranteed by the state which meant a lower cap rate (higher valuation). As I dove deeper into the business model I realized charter schools are a total scam. And the “managers” (MBAs not educators) continued to build more charters going fully into the business as a real estate development play, no mention of education.

    1. hemeantwell

      And more wow over another one of those category defilements that capitalism blindly carries out. The real estate grounding of corporate profits was exactly the mechanism used by Ray Kroc to make his pile while he was nominally building the MacDonald’s burger franchise empire. The Keaton film, “The Founder,” underlines this. There’s lots to watch out there, I give it a recommendation nonetheless.

    2. loblolly

      As I dove deeper into the business model I realized charter schools are a total scam. And the “managers” (MBAs not educators)

      The very same MBAs that have destroyed the universities?

  3. bmeisen

    The parallel to Enron is not clear. Are the finances of related-parties of EMOs – more precisely their debts – showing up on the balance sheets of EMOs? If not then I’ll go for the Enron parallel. That’s why Fastow and Co. went to jail as I recall: they committed fraud by putting Enron’s debt in special entities i.e. related-parties that were not consolidated in Enron’s reporting. Fastow has been out for a while – is he one of the Enronites who is active in charter schools now?

    The Charter School issue is another testimony to the rot in America. Granted public schooling is not perfect. If you really want to ruin it fund it through local property taxes and allow a competing system of education to drain public finances. Funding of public educaiton through local property taxes is the key mistake. I may be out of touch and things may have changed. Surely states and the feds are shovling substantial amounts at public education but if the core funding is still local property taxes then that is the fatal flaw.

    1. lyman alpha blob

      You are not out of touch and have hit the nail on the head – until we stop funding public schools through property taxes things will not get better.

      As to your last sentence, in theory you’re correct but in practice not so much. Several years ago the Maine legislature mandated that the state fund 55% of public education and then proceeded to not
      distribute those funds. Then last year the people passed a referendum raising taxes on high earners specifically to fund the education mandate the legislature passed many years earlier since they couldn’t seem to get it together themselves.

      As this article mentions, the state legislature may decide to change the language as some are ‘concerned’ that taxing the wealthy isn’t the way to go. The opponents of the referendum (largely the Chamber of Commerce) say there are better ways to fund education but are pretty quiet when asked what those might be.

      Better to just let the schools rot I suppose.

    2. Katharine

      Property taxes still play far too big a role. There are a lot of states that have introduced systems that are supposed to improve equitability of funding between rich and poor districts, but as so often happens the people with the most political power have an interest in protecting what they regard as their own. A good resource for current law, court challenges, &c is

      which was created by the Campaign for Educational Equity at Teachers College (Columbia).

    3. Clearpoint

      Different scam altogether. Enron’s scammers hid the debt because they were making their $$$ on the stock price gains. Charter school scammers are making their $$$ by paying inflated prices to related parties.

  4. DJG

    In a few minutes, this article will be linked to some “school reform” site, and the commenters will give us the benefit of “reform”:

    –I wanted a private school because the government schools are full of propaganda, and I want the taxpayers to pay for my follies. Besides, I don’t want to pay private-school tuition or send my kids to a Catholic school, Heaven Forfend.
    –I don’t have time to home school, but I wanted something that has been proven to be equally unsuccessful, a charter school. It is hard when you can’t assure that the book of Genesis is used in science class.
    –I am opposed to unions, so I want a school with under-performing, underpaid teachers.
    –It’s okay that the charter schools skim public monies, because that is how business is done these days in the U S of A. Look at Betsy DeVos and her rellie Erik Prince. Upstanding and successful, blessed by God!

    And please, please, lower the tuition at the University of Illinois, Urbana Champaign, because my little scion wants to go there. It’s a good school!

  5. flora

    Thanks for this post.

    Charters are the Uber of K-12 education.

    “In a phone conversation with Legg, she described how charter school expansions are being driven by a state legislature with numerous connections to the charter school industry. “States get around local control by using a statewide contract for charters,” she explained. And whenever a local board rejects a new charter school or threatens a charter school with closure, the school can appeal to the state. ” (my emphasis)

    1. flora

      and, about real estate, from the Salon article linked above:

      “Reporters for the Florida Times Union noticed this emergence in 2013, reporting a “growing cadre of influential lobbyists” hired by the charter school industry, and an increased spending by those lobbyists to influence lawmakers “at a time of rapid enrollment growth, a host of key policy wins, and the redirection of state construction funding away from traditional public schools” to new charter schools.” (my emphasis)

  6. Arizona Slim

    A few years ago, I read Ben Chavis’ book about his Oakland charter schools. The title: Crazy Like a Fox. Read it if you’re into extended exercises in self congratulation.

  7. sgt_doom

    Colossal blog posting. A similar financial structure appears with the private prisons as well.

  8. Knot Galt

    I was in North San Diego County recently and I drove into a large business park comprised of about 8 or 9 tilt-up concrete panel buildings. And in the back, poorly signed, was a K-12 charter school operating out of two buildings. Seeing kids walking between buildings and several other kids waiting for their parents to pick them up seemed out of place. But reading the article, the experience I had makes sense, now.

    I suspect this type of business is happening at a much greater scale in outlying suburbs across the country, including our flyover states. Looking at the context of the San Diego County area, and perhaps applying a certain bias, the parents picking up their offspring were not the types that you would expect work for agriculture or the military; both prevalent employers in Oceanside.

  9. screen screamer

    I will admit to being unfamiliar with charter schools. Having read some of the comments of the last article on schools in reference to charters, there doesn’t seem to be a blanket consensus on the subject. There appears to be some successful charters, but far and few depending upon the input of the parents involved.
    What I am familiar with, in a most personal way, is how the schools have drugged an entire generation of young boys thus bringing in untold millions from the state and federal governments to aid the staff of children who have been labeled as troubled.
    This has not been addressed properly in my view and many people should be jailed or at least fired for such an egregious act of hatred towards our young men. Not to mention the hundreds of billions spent on educating people who are no longer able to read or write.
    The other thing that I think noteworthy is how public schools got their start. Mostly at the behest of industrialists and well heeled types who saw the need to have an educated populace to work in their factories. In other words, corporate sponsors, and or utopian types who decided for us that this is how our society should be set up. Included in this thought process was the effort to create a layer of educated bureaucrats who shared this vision.
    We are now in a post industrial society where AI threatens to take over many daily tasks thus making most humans obsolete as far as work goes, which has been addressed at different times on this site. I think public schools have outlived their usefulness in present day society and public schools and charter schools are going to become persona no grata in the near future. I think it would be well advised to start leaning in a direction that does not lead to the institutionalization of millions of children for twelve or more years.

  10. loblolly

    Is there no successful charter school anywhere, or are we not allowed to talk about that possibility? If we refuse to acknowledge that some public schools are troubled and some may not be salvageable we are going to get steamrolled by the pro charter movement.

    A movement which includes more than just greedy dicks and the stupid. Think back to November 2016 if you have forgotten about the echo chamber you may be living in. Approximately half of America does not much care for being told there is no solution to their legitimate concerns. People are angry that their kids are not getting the education they need.

    Things are going to change. We can have a say in that change and play a part, or we can resist and be side stepped.

  11. witters

    “Things are going to change. We can have a say in that change and play a part, or we can resist and be side stepped.”

    Embrace the Change! (Do people not realise they are mouthing neoliberal cliches as words of great wisdom? And here doing it when trying to talk seriously about education!)

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