Financial review of D.C. charters includes new scrutiny of management contracts

The D.C. Public Charter School Board released its annual review of charter school finances this week, and for the first time, the board offered a snapshot of schools that have contracts with outside management companies, expenditures of taxpayer dollars that are difficult to track.

At least 14 schools — about 25 percent of the city’s charters — pay fees to nonprofit or for-profit management companies, and those companies’ public financial disclosures vary widely, according to the board’s review. The schools pay management fees ranging from 3 percent to 100 percent of their total revenue.

Several schools “have an operating agreement with a management organization that prevents the kind of transparency necessary to assure that schools are operating appropriately,” the board wrote. But the board’s executive director, Scott Pearson, said the majority of contracts do not present cause for concern.

“In many cases, management companies can be a strong force for quality and choice in schools, because they allow for the transmission of best practices from one school to another and they allow for the sharing and centralization of costs,” Pearson said. “But we thought it was important that we put all the information out there that we have about each of these relationships so it could be publicly available.”

The new scrutiny of management contracts comes after two lawsuits alleging that D.C. charter school leaders used outside companies to divert millions of taxpayer dollars into their own pockets. In both cases, defendants have argued that they did nothing wrong and that their financial transactions mirrored those of other city charter schools.

During last year’s financial year, the board concluded that both of those schools — Options Public Charter School and Community Academy Public Charter School — had “shown no patterns of fiscal mismanagement.” That review, which emphasized the improving fiscal health of city charter schools, did not report on schools’ relationships with management companies, over which the charter board has almost no authority.

Charters, which are required by law to be nonprofit organizations, receive more than $600 million in city tax dollars each year. In return, the schools are required to submit independent financial audits, annual budgets, large contracts and other financial data to the city charter board.

But when charter schools pay outside management organizations, the charter board has little ability to monitor how those tax dollars are used. The board is seeking legislative changes that would give it the additional authority to examine management companies’ books and records.

The board’s summary of schools’ contracts with outside companies shows that some schools pay not just management fees to outside companies, but also rent payments to affiliates of the same companies.

Imagine Hope Community Charter School, for example, pays a 12 percent management fee ($1.7 million) to Imagine Schools Inc., a Virginia for-profit company that runs dozens of schools across the country. Imagine Hope pays an additional 19 percent of its revenue ($2.7 million) in lease payments to Schoolhouse Finance, an affiliate of Imagine Schools that specializes in real estate.

Pearson said that although there have been instances elsewhere in the country of fraudulent rent charges for charter schools, the board is not concerned about Imagine Hope’s fees or rent payments.

“In many cases, the management company has the financial resources to purchase the building and undertake the renovations, and it’s fully appropriate to charge a reasonable rent to the school,” Pearson said.

The compensation of top executives at some management companies isn’t clear because of limits on the charter board’s authority to examine those firms’ expenditures. The salary of the chief executive of Imagine Schools is unknown, for example, while the chief executive of Schoolhouse Finance earns $390,000, according to the charter board’s review.

In cases where executive compensation is known, salaries vary. For example, the chief executive of CentroNia, a nonprofit that serves as a management company for D.C. Bilingual, earned $141,000 in 2012, while the chief executive of the nonprofit that manages D.C. Scholars earned $220,000.

The board’s annual financial review is meant to flag signs of fiscal distress to ensure that schools can make changes before they become insolvent. During the past four years, the number of high-performing schools has increased from 13 to 31, while the number of low-performers has fallen from 11 to five.

“We used to have a situation where charter schools would run out of money in the middle of the year, and ever since we put this system in place, that hasn’t happened anymore,” Pearson said.

Emma Brown writes about D.C. education and about people with a stake in schools, including teachers, parents and kids.
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