Recent fraud allegations against leaders at two D.C. public charter schools have illuminated what city officials are calling a gap in their ability to effectively oversee the financial dealings of the fast-growing charter school sector.
Following two cases in which the D.C. attorney general has accused charter school leaders of schemes to divert millions of tax dollars to private companies they owned, the D.C. Public Charter School Board is seeking legislative changes that would give it greater authority to examine the records of some of the organizations that manage the city’s charter schools.
The charter board also is looking to tighten standards that charter schools must meet to sign contracts with “related parties,” such as school founders, school employees, members of the board of directors and their relatives.
While the move indicates that the charter board wants more transparency, it also shows that city officials often don’t know how management companies are spending tax money that is meant for students’ benefit.
Any new authority probably will be narrow: The charter board’s draft legislation, developed months ago, would allow it to examine the records of only a small number of companies. The notion of broad new oversight power probably would spark protest from some in the charter school movement, which is built on the premise that schools should operate free of outside interference as long as they produce solid academic results.
Scott Pearson, the charter board’s executive director, said he doesn’t want new rules to be so onerous or invasive that they deter good charter operators. But “they’re using taxpayer dollars, and there should be a standard” for how those dollars are used, Pearson said.
The D.C. attorney general in October sued three former managers of Options Public Charter School for allegedly funneling more than $3 million from the school to two for-profit companies they owned. In May, the attorney general sued the founder of another charter school, Community Academy, alleging that he enriched himself by creating a shell management company that was paid more than $13 million in taxpayer dollars for work largely performed by school employees.
The charter board had given a clean bill of financial health to both schools in June 2013, finding “no patterns of fiscal mismanagement” at either, according to a charter board report.
Defense lawyers in both cases have argued that the charter schools’ business deals were legal and no different than contracts that more than a dozen D.C. charter schools have with outside management companies to operate the schools in exchange for a fee.
Several charter school management companies declined to comment on the board’s effort to seek additional oversight authority because legislation has not yet been introduced. Ramona Edelin, executive director of the D.C. Association of Chartered Public Schools, also declined to comment, saying that her members haven’t yet discussed the issue.
Donald Hense, executive director of the Friendship charter schools, one of the largest networks in the city, criticized the D.C. attorney general’s most recent lawsuit as unfair and said the charter board’s desire for more authority is part of a pattern of overreach. And Kara Kerwin, president of the pro-charter Center for Education Reform, said she worries that giving the charter board more power “is a slippery slope.”
“Allowing the legal process to take care of malfeasance is the proper way to go, as opposed to the charter board imposing more regulation,” Kerwin said.
City taxpayers send more than $600 million to charter schools, and in return, charters — which are required by law to be nonprofit organizations — submit independent financial audits, annual budgets, large contracts and other financial data to the city charter board.
The charter schools that have contracts with outside management organizations send fees that range from 2 to 100 percent of their operating budgets.
The management agreements are something of a financial black hole, according to charter school board officials, who say they have limited ability to monitor how the tax dollars are used. When the management organizations are private for-profit companies, they are not subject to the same financial disclosure rules as nonprofits.
There are at least four for-
profit charter management companies operating in the District now: Imagine Schools Inc., a Virginia company that runs Imagine Southeast and Imagine Hope Community schools for a fee of 12 percent of each school’s revenue; Academica, a Florida company that runs Somerset Prep Academy for a 5 percent fee; Community Action Partners, which collects a 6 percent fee to run the Dorothy I. Height Community Academy Public Charter School; and Basis Educational Group, an Arizona company that runs Basis DC for a 20 percent fee.
Phil Handler, a spokesman for Basis Educational Group, said the company’s fee is relatively high because the company covers the salaries of the school’s top officials.
Most of the management companies operating in the District are nonprofits, and two charter schools slated to open in D.C. next fall — Democracy Prep and Harmony — also are run by out-of-state nonprofits.
Nonprofits must disclose some financial information with the Internal Revenue Service annually via Form 990, including the salaries of any employees who make more than $100,000. But charter board officials said that the publicly available information is not necessarily sufficient for strong oversight.
St. Coletta Special Education Public Charter School transfers its entire $16 million budget to its management organization. As a result, the charter school’s public budget is stark, showing that the school spends zero dollars on personnel, office expenses and student services.
The management organization, St. Coletta of Greater Washington, operates two schools under the same roof, a D.C. public charter and a private school that accepts tuition-paying students from Maryland and Virginia. Pearson said that while the board has no reason to suspect wrongdoing at St. Coletta, it’s difficult to know for sure that D.C. tax dollars are being used only to serve D.C. public school students.
St. Coletta executive director Sharon Raimo said the charter school and the parent organization already go through multiple layers of financial review by independent auditors and the IRS, state education agencies, Medicaid oversight agencies and the D.C. Public Charter School Board.
“I don’t know what else we could possibly give them that they don’t already have,” Raimo said, adding that she wasn’t afraid of additional oversight but that it would take more of her staff’s time.
Last fall, the charter board proposed legislation that would give it access to the books and records of only a subset of management organizations: those that received more than half their income from D.C. charter schools or received more than 20 percent of any one school’s budget.
Such expansion of oversight probably would affect only a few existing management organizations. Robert Cane, executive director of the pro-charter group Focus, said he could support such narrow expansion, but it would not be appropriate to demand financial records from management companies that run schools across the country and receive only a small fraction of their income from D.C. charters.
The charter board’s existing draft legislation would require schools entering contracts with related parties to ensure that those deals are fair and that conflicts of interest are fully disclosed to the school’s board of directors. Currently, schools have to meet one of those two conditions to comply with the law. The charter board is working to refine the proposed legislation.
D.C. Council Education Committee Chairman David A. Catania (I-At Large) said last fall that he was willing to work with the board to pass legislation and a spokesman for Mayor Vincent C. Gray (D) said Gray is also supportive.
There has been no public movement on the issue, but the May lawsuit against Kent Amos, the founder of Community Academy, appears to have kick-started discussions again. “My sense is we’re both committed to resolving this, so I would be surprised if we don’t have some legislation by the end of the council term,” Pearson said.