Submitted by Elaine Magliaro, Guest Blogger

In a 2010 New York Times article titled Charter Schools’ New Cheerleaders: Financiers, reporters Tripp Gabriel and Jennifer Medina wrote the following about what was going on in the state of New York:

Wall Street has always put its money where its interests and beliefs lie. But it is far less common that so many financial heavyweights would adopt a social cause like charter schools and advance it with a laserlike focus in the political realm…

Although the April 9 breakfast with Mr. Cuomo was not a formal fund-raiser, the hedge fund managers have been wielding their money to influence educational policy in Albany, particularly among Democrats, who control both the Senate and the Assembly but have historically been aligned with the teachers unions.

They[hedge fund managers] have been contributing generously to lawmakers in hopes of creating a friendlier climate for charter schools. More immediately, they have raised a multimillion-dollar war chest to lobby this month for a bill to raise the maximum number of charter schools statewide to 460 from 200.

That same year—2010—Juan Gonzalez believed that he had uncovered one of the reasons why hedge fund managers, some wealthy Americans, and the executives of some Wall Street banks had become such big proponents of charter schools and had gotten involved in their development. Gonzalez said the banks and other wealthy investors had been making “windfall profits” by taking advantage of “a little-known federal tax break to finance new charter-school construction.” That little know tax break, the New Markets Tax Credit, can be so lucrative, Gonzalez said, “that a lender who uses it can almost double his money in seven years.” He added that the tax break “gives an enormous federal tax credit to banks and equity funds that invest in community projects in underserved communities, and it’s been used heavily now for the last several years for charter schools.”

Gonzalez focused his research on the city of Albany—which, he wrote, “boasts the state’s highest percentage of charter school enrollments.” He provided an explanation of how lucrative investments in building new charter schools can be:

What happens is the investors who put up the money to build charter schools get to basically or virtually double their money in seven years through a thirty-nine percent tax credit from the federal government. In addition, this is a tax credit on money that they’re lending, so they’re also collecting interest on the loans as well as getting the thirty-nine percent tax credit. They piggy-back the tax credit on other kinds of federal tax credits like historic preservation or job creation or brownfields credits.

The result is, you can put in ten million dollars and in seven years double your money. The problem is, that the charter schools end up paying in rents, the debt service on these loans and so now, a lot of the charter schools in Albany are straining paying their debt service–their rent has gone up from $170,000 to $500,000 in a year or–huge increases in their rents as they strain to pay off these loans, these construction loans. The rents are eating-up huge portions of their total cost. And, of course, the money is coming from the state.

Brighter Choice Foundation

According to Gonzalez, “a nonprofit called the Brighter Choice Foundation had employed the New Markets Tax Credit to arrange private financing for five of the city’s nine charter schools.” By 2010, many of those charter schools were struggling to pay escalating rents, which were “going toward the debt service that Brighter Choice incurred during construction.”

Gonzalez gave examples of the escalating rents:

The Henry Johnson Charter School saw the rent for its 31,000-square-foot building skyrocket from $170,000 in 2008 to $560,000 in 2009.

The Albany Community School‘s went from from $195,000 to $350,000.

Green Tech High Charter School rent rose from $443,000 to $487,000.

Gonzalez reported that a number of Albany’s charter schools have fallen into debt to the Brighter Choice Foundation. He wondered why the schools’ financial problems hadn’t raised eyebrows with state regulators or caused concern for the charters’ school boards. He noted that the powerful charter school lobby had “so far successfully battled to prevent independent government audits of how its schools spend their state aid.” He added that “key officers of Albany’s charter school boards are themselves board members, employees or former employees of the Brighter Choice Foundation or its affiliates.”

Gonzalez said that the city of Albany is “exhibit A in the web of potential conflicts that keep popping up in the charter school movement.” It appears Gonzalez is correct about Albany being just one example of what’s going on in the movement. Brighter Horizons isn’t the only “foundation” or company making profits off of charter schools.

Imagine Schools Inc.

There is a national charter school company called Imagine Schools Inc., one of the biggest for-profit charter school management companies in the country. Matthew Haag of the Dallas Morning News wrote about Imagine Schools in 2008:

A national charter school company that plans to open new schools in Texas, including one in McKinney, has run afoul of an education official in Nevada and two of its former principals, and they all pose the same question.

Does Imagine Schools Inc. force its charter schools to spend too much money on complex real estate deals and not enough money on teachers and academic programs?

Virginia-based Imagine Schools has emerged as one of the largest for-profit charter school management companies, running several dozen schools in 12 states. It plans to open Imagine International Academy of North Texas in McKinney next year.

Charter schools house their students in Texas in a variety of ways, according to the former Charter Resource Center of Texas, from renting space in a shopping center to doing complex property transactions such as Imagine’s.

Typically, after an Imagine-managed charter school gets approval to open, Schoolhouse Finance, Imagine’s real estate arm, purchases a campus and charges the school rent. After the school begins to pay that rent, Schoolhouse sells the campus to a real estate investment trust, which then leases it back to Schoolhouse.

The charter school eventually sends rent payments – in one case upward of 40 percent of the school’s entire publicly funded budget – to two for-profit companies.

“The arrangement is very lucrative because it’s a direct conduit to public funds. The school [property] is paid off with public funds,” said Gary Horton, who oversees charter school funding for the Nevada Department of Education. Nevada’s charter schools include Imagine’s 100 Academy of Excellence in North Las Vegas.

Haag added that charter schools in Texas are generally exempt from the kind of financial oversight that “state education officials give school districts. The agency annually grades how school districts spend their money, but not yet for charters.”

Haag explained what happened with 100 Academy of Excellence in Nevada:

In Nevada, the state awarded 100 Academy of Excellence in North Las Vegas a charter, and the school hired Imagine to run its educational services. Schoolhouse Finance, the Imagine subsidiary, paid for the school’s property and building construction. Schoolhouse Finance then leased the property to the charter school for $1.4 million a year.

Next, Schoolhouse Finance sold the $8 million property to a real estate investment trust, Kansas City, Mo.,-based Entertainment Properties Trust. The trust then leased the property back to Schoolhouse Finance at a lower rate than the charter school pays.

Money remaining after Schoolhouse Finance pays its lease to the trust goes to Imagine Schools Inc. This tiered lease system has led to 10 percent returns on investment for owners and investors in the two companies, Sharp said.

But 100 Academy of Excellence’s annual rent, which represents 40 percent of its annual state-funded budget, leaves the school struggling to pay for textbooks, according to Nevada Department of Education records.

“My concern is that I have to make payments [to the charter school], and I know the payments aren’t going to the kids,” said Horton, a persistent critic of Imagine’s operations.

Stephanie Strom reported in the New York Times in 2010 that soon after 100 Academy of Excellence opened in 2006, the school board began documenting problems. Its bookkeeping practices were lax and it lacked a sufficient number of licensed teachers. The school had also violated regulations requiring competitive bidding when it paid Imagine “for necessities like furniture and computers.”

Strom added that the school had had three principals in four years. She said that two of the principals had been “pressured to resign after complaining that there was not enough money for essentials like textbooks and a school nurse.”

In addition, Strom reported that regulators in a number of states had found that Imagine Schools had “elbowed the charter holders out of virtually all school decision making — hiring and firing principals and staff members, controlling and profiting from school real estate, and retaining fees under contracts that often guarantee Imagine’s management in perpetuity.”

The regulators claimed that Imagine’s arrangements allowed it to use “public money with little oversight.” Marc Dean Millot, a former president of the National Charter Schools Alliance, said, “Under either charter law or traditional nonprofit law, there really is no way an entity should end up on both sides of business transactions.” He added, “Imagine works to dominate the board of the charter holder, and then it does a deal with the board it dominates — and that cannot be an arm’s length transaction.”

White Hat Management

In a 2011 Pro-Publica article titled Charter Schools Outsource Education to Management Firms, With Mixed Results, Sharona Coutts wrote about charter schools run by White Hat Management in Ohio:

Since 2008, an Ohio-based company, White Hat Management, has collected around $230 million to run charter schools in that state. The company has grown into a national chain and reports that it has about 20,000 students across the country. But now 10 of its own schools and the state of Ohio are suing, complaining that many White Hat students are failing, and that the company has refused to account for how it has spent the money.

The dispute between White Hat and Ohio, which is unfolding in state court in Franklin County, provides a glimpse at a larger trend: the growing role of private management companies in publicly funded charter schools.

Coutt reported that about one third of the charter schools in this country are now run by management companies, which can be either for-profit or non-profit, and not run locally. These companies not only have the right to hire and fire staff—they can also develop curricula and discipline students. She added that while the “shortcomings of traditional public schools” have been under scrutiny in recent years—“a look at the private sector’s efforts to run schools in Ohio, Florida and New York shows that turning things over to a company has created its own set of problems for public schools.” She said that government data on charter schools suggest that those with “for-profit managers have somewhat worse academic results than charters without management companies, and a number of boards have clashed with managers over a lack of transparency in how they are using public funds.”

The Ohio Department of Education joined the lawsuit in the fall of 2010. It asked the court to help the “group of public schools break free from dominance by private interests.” The department argued in a court motion that things had not gone well under White Hat’s management. It said, “Most of the schools have received the equivalent of D’s and F’s on their State report cards and their performance has declined during the term of the agreements.”

James D. Colner, an attorney representing the schools, said, “A big part of the argument here is being able to follow the money. We have no idea whether they’re earning a reasonable profit or not. We have no idea whether the money is being efficiently or effectively spent for our students.” That should be of great concern to citizens of Ohio. Coutt contends that oversight of the industry has lagged. She added that it has resulted “in a patchwork of state and district regulation, which experts say is failing to safeguard the interests of children and taxpayers.”

Closing

Laura Clawson (Daily Kos):

In short, education reform is a good cause. Experimentation is good — and some of the best charter schools today have experimented in what could be valuable ways. But the push, coming from Wall Street and the extremely wealthy, for this specific form of charter schools, for this specific way of funding them, is part of both short-term and long-term drives for profit that will accrue to the wealthiest while weakening the middle class. The question is not whether we should back away from the cause of education, or the cause of education reform. The question is in whose interests it should be done and who should most strongly influence the outcomes.

SOURCES & FURTHER READING

Juan Gonzalez: Big Banks Making a Bundle on New Construction as Schools Bear the Cost (Democracy Now!)

Albany charter cash cow: Big banks making a bundle on new construction as schools bear the cost (New York Daily News)

Show us the money: “Master Class” for private equity investors in public education (Parents across America)

“New market tax credits” and charter schools (Parents across America)

Cashing in on the charters: Petrino DiLeo exposes a new attempt by Wall Street to make money off our schools (Socialist Worker)

Charter school company with plans for McKinney is criticized (Susan Ohanian)

The big business of charter schools (Washington Post)

Evil Ed, inc: the Wall Street-charter school connection (Open Left)

Corporations Advise School Closings, While Private Charters Suck Public Schools Away: As charter proponents aim to cash in on major investment returns, Philly braces for a massive schools shakeup.  (AlterNet)

Charter Schools’ New Cheerleaders: Financiers (New York Times)

For School Company, Issues of Money and Control (New York Times)

Charter Schools Outsource Education to Management Firms, With Mixed Results (Pro Publica)

Education: follow the money (Daily Kos)

Wall Street Hearts Charter Schools, Gets Rich Off Them (FireDogLake)

Wall Street Behind Charter School Push (Huffington Post)