(Update: Adding new information)
Consider this scenario: A for-profit company operating a charter school uses public funds — that means American taxpayer dollars — to buy computers, copiers, desks and other things for students and staff. The charter school decides to get a different management company. Who should get the computers, copiers and other machines purchased with public dollars? The schools or the for-profit company?
It if seems like a no-brainer to you, it wasn’t for the Ohio state Supreme Court. In a mixed-decision, it ruled on Tuesday in a lawsuit by 10 now-closed charter schools that the for-profit company that once operated them, White Hat Management, owns equipment it purchased for the schools with public funds. How did the court reach this decision?
White Hat is one of the largest for-profit charter school operators in Ohio and runs dozen of charter schools that have consistently received low grades from the state, which has a $1 billion charter sector that is as troubled as any in the country.
A June 2015 story in the Akron Beacon Journal about the newspaper’s review of 4,263 audits released last year by the state said that Ohio charter schools appear to have misspent public money “nearly four times more often than any other type of taxpayer-funded agency.” It says that “since 2001, state auditors have uncovered $27.3 million improperly spent by charter schools, many run by for-profit companies, enrolling thousands of children and producing academic results that rival the worst in the nation” — and the misspending could be much higher.
Efforts by Ohio’s lawmakers to require better oversight of charters have been unsuccessful. On the same day as the ruling, members of the Ohio school board questioned Richard Ross, the state’s superintendent of instruction, about a charter school data scandal involving the state Education Department, according to NewsNet5. Ross said he did not know that David Hansen, the department official responsible for school choice and charter schools, was giving help to charter schools to make them look better in state evaluations. Hansen resigned in July.
If all of this doesn’t underscore the need for change in the sector, it’s hard to see what would.
State Impact in Ohio, a project of NPR stations, calls the Akron-based White Hat “a charter school giant.” It says White Hat is owned by former manufacturing company chief executive David Brennan:
Brennan has played a major role in shaping Ohio education policy. He and his family members have donated millions to state legislators and governors over the past decade. And White Hat lobbyists have played significant roles in shaping Ohio’s charter school policies. White Hat handles the day-to-day operations of the Ohio charter schools it manages, doing everything from hiring teachers to ordering school supplies.
White Hat was sued by the governing boards of 10 of the dozens of schools it had managed. Each of the schools signed virtually the same contracts with White Hat in 2005. The schools received a total of more than $90 million in public money from 2007 to 2010, though only two performed at levels the state considered satisfactory during those years. According to the court decision:
Of the ten original schools, as of the 2010-2011 school year, two Hope Academies had been shut down by the Department of Education due to academic failure and three were on “academic watch”; one of the Life Skills Centers was on academic watch and second was on “academic emergency” (one step away from shut-down). This poor performance caused the schools to raise several issues, including how White Hat spent the money it received to operate the schools. Financial information revealed that White Hat spent money to purchase buildings ultimately owned by or renovated for the benefit of its own affiliates. According to the schools, although White Hat used part of the continuing fee to purchase personal property for use in the schools, it improperly titled that property in its own name.
The schools filed suit in 2010 after White Hat refused to provide further information on how it had used the public funds. The decision said:
The complaint sought declaratory and injunctive relief, an accounting, and damages for breach of contract and breach of fiduciary duty. As part of their allegations, the schools disputed White Hat’s claim of entitlement to all property White Hat purchased using public funds.
The schools said that White Hat had received nearly all of the public funding they had been given to operate and that the schools should have a right to what was purchased with the money.
The court majority did not agree, saying that it was enforcing a contract between the schools and White Hat and that the schools would have to pay more to White Hat to get the equipment. The majority opinion was written by Justice Judith Lanzinger, who conceded that White Hat’s schools were not high performers but that the contracts were valid. The majority opinion says:
Although, as will be seen, the wisdom of the buy-back term can be questioned, we hold that the term is enforceable and that this case must be returned to the trial court for an inventory of the property and its disposition according to the contracts. We rule narrowly on the issues before us, leaving public-policy matters to the General Assembly.
Lanzinger also wrote:
It is evident that the schools have granted broad discretion to White Hat, placing special confidence and trust in the management companies and placing them in positions of superiority and influence.
Some of the dissents by justices were stinging. Justice William O’Neill, the only Democrat on the court, called the relationship between White Hat and the charter schools “a fraudulent conversion of public funds into personal profit,” and he wrote that the majority decision itself “rewards failure and encourages its repetition in the future in the name of profit.”
I concur that a management company has a fiduciary relationship with a community school when it undertakes the daily operation of a community school. However, I dissent from the decision to uphold the contract, as it violates public policy and is unenforceable as a matter of law. …
Simply stated, defendant White Hat Management, L.L.C., voluntarily signed a contract that bound it as a fiduciary to two distinct entities: the taxpayers of the state of Ohio and the parents of the children who attend the community schools [charters] operated by White Hat. By contract, White Hat promised to safeguard and effectively utilize $90 million of public funds that were specifically set aside to educate the children of Ohio. And by contract, White Hat promised the children of Hope Academy that it, White Hat, would fulfill its fiduciary duty by providing a quality education for the sum of $90 million. The only part of that contract that was fulfilled was that White Hat thoroughly and efficiently received the $90 million. There has been no quality education, there has been no safeguarding of public funds, and there most certainly has been no benefit to the children.
It is presumed that there are good community schools. These White Hat schools are not in that category. The record is clear: White Hat provides substandard service for outrageous fees in the name of profit. The schools in this case received more than $90 million in public money from 2007 to 2010. And their performance level as attested to by the state was consistently poor. Indeed, only two of the ten schools performed satisfactorily under state standards during that time frame.
Against this backdrop of failed promises and termination for failure to deliver, a majority of this court intends to reward White Hat with the termination bonus that White Hat arranged for itself in the contract. Neither public policy nor contract law can ever be stretched far enough to reach that preordained result.
Justice Paul Pfeifer wrote:
The contracts in this case are plainly and obviously unconscionable. The contracts require that after the public pays to buy those materials for a public use, the public must then pay the companies if it wants to retain ownership of the materials. This contract term is not merely unwise as the opinion would have us believe; it is extremely unfair, so unfair, in fact, as to be unconscionable. The contract term is so one-sided that we should refuse to enforce it.
Jan Resseger wrote on her blog:
It is not surprising that the boards of the schools failed to negotiate a careful, tough contract with the management company to protect the schools’ assets for the schools. It has been known for years that White Hat played an active role in helping recruit members of the boards of its schools—board members whose job was supposedly to oversee the performance of the management company. In March of 2014, Doug Livingston reported for the Akron Beacon Journal that several board members of White Hat schools admitted openly that they had been recruited by White Hat Management to sit on charter school boards, despite that the IRS expects “a bright line between the charter-school governing board and the management company hired to run the school. The company should not create the board or recruit its members, and any evidence of boilerplate contracts from one school to the next suggests the company many be in control.” One board member told the Beacon Journal that White Hat had asked her to serve on the boards of four of its schools.
Stephen Dyer of Innovation Ohio explains that Justice Lanzinger received a $5,000 campaign donation from David Brennan in 2004. Chief Justice Maureen O’Connor received campaign donations from Brennan in 2002, 2008, and 2010, totaling $11,900. Justice Judith French received a donation last year from Brennan of $7,200. Dyer notes that Justice Terrence O’Donnell, who has received $15,000 from Brennan over the years, recused himself. Justice Paul Pfeiffer has not accepted a campaign donation from Brennan since the early 1990s….
Two weeks ago, Brent Larkin, the Plain Dealer‘s editorial director from 1991 until his retirement in 2009, commented on the pending decision of the state supreme court in the White Hat Case: “White Hat is owned by Akron’s David Brennan. He and William Lager, owner of the Columbus-based Electronic Classroom of Tomorrow, who have made millions by taking our money and not educating kids, have funneled more than $6 million into Republican candidates and causes.” “Operators of Ohio’s growing number of lousy charter schools are one win away from hitting a trifecta. They’ve got the legislature in their hip pocket and a governor who is an inexplicable and inexcusable no-show on the issue. Two down, one to go: The payoff for controlling the judiciary won’t be millions. It’ll be tens, maybe hundreds, of millions. And every single penny of it will come from your pocket. Only in Ohio could charter school operators come this close to essentially having their way with all three branches of government.”
Yesterday the Ohio Supreme Court confirmed Larkin’s fears.
Here’s the full court ruling: