Charters reap money from quirk in state law
The five-story brick and concrete building overlooking Brighton Road in Perry South features a Propel schools banner over its front door, with signs for the charter network at every approach.
The 99,155-square-foot Propel Northside is owned, though, by School Facilities Development Inc., a nonprofit corporation with a very narrow role: leasingproperty to Propel.
SFD’s ownership allows Propel to collect about $322,000 in annual lease reimbursements from the state — money it wouldn’t get if it owned its school buildings. It’s an arrangement that had drawn criticism from the state’s top auditor and is threatenedby proposed legislation.
“You’ve created this nonprofit and sort of in a sense, you control
it,” said Auditor General Eugene DePasquale, a critic of the state’s charter school law. “You’re getting a lease reimbursement for renting to yourself.”
Since 2004, SFD has spent $32.6 million buying a portfolio of seven schools, comprising most of Propel’s 11 locations. With no employees and just a few volunteers and part-time consultants, the nonprofit receives $3 million in annual lease payments from Propel schools, and after debt payments runs annual six-figure surpluses.
From 1965 to 2006, the Pittsburgh Public Schools owned the building, maintained it and used it as Columbus Middle School. That simple arrangement isn’t mirrored in the charter school world, where specialized nonprofits take on various roles and receive millions of dollars in publicmoney.
“Real estate is held in a separate company,” said Propel Executive Director Jeremy Resnick, recounting the advice he has received from attorneys and financiers during Propel’s 15-year history. “This is how it’s being done.”
The ability to tap state reimbursements is “certainly a factor” in Propel’s lease arrangements, Mr. Resnick said. “I’m not going to say it’s not an important amount of money. It’s a lot of money. But it’s being spent on kids.”
Charter schools in Pennsylvania are universally led by nonprofit entities, but some also do business with separate tax-exempt corporations created to serve their specific needs. Sometimes, that has raised questions. A nonprofit was part of the money trail at the center of the successful prosecution of the former CEO of the Pennsylvania Cyber Charter School.
PA Cyber is now “in a dramatically better place,” Mr. DePasquale said. But the outsourcing of charter school functions to specialpurpose nonprofits is still a problem, he said, because the organizations sometimes claim to be outside of the scope of laws governing open records and state auditing.
“When they say, ‘we’re a private business,’ I somewhat chuckle at that,” he said, “because some of them have been set up simply to get the management of the charter schools out of the public view.”
Leasing to itself?
When traditional school districts want to build or improve schools, they typically ask the state to pay part of the cost. Charter schools, though, are not eligible for school construction reimbursements from the state, nor for payments related to buildings theyown.
When Mr. Resnick launched Propel and sought to open a school in Homestead, he cast about for someone to construct an appropriate building, which he would rent from them. He couldn’t find anyone interestedin the job.
So Mr. Resnick helped to create SFD, which has a board separate from Propel’s but has shared the school’s mailing address, lawyers and accountants. Since then, SFD has worked with the Allegheny County Industrial Development Authority to borrow money by issuing tax-exempt bonds, then bought schools in Homestead, Munhall, Turtle Creek, McKeesport, Braddock Hills, Kennedy and Perry South, all of which it leased to Propel.
For instance, SFD bought the former Columbus Middle from the Pittsburgh Public Schools for $930,000 in 2014. That year SFD and Propel enteredinto a lease under which the school pays $120,000 a year. For that school’s lease cost, the state reports reimbursing Propel $30,809, a figurebased on a formula driven largelyby the student count.
While Propel gets lease reimbursements that last year totaled $322,000, SFD runs annual surpluses. SFD netted $521,442 last year and $302,718 in 2015. Its chief financial officer, Larry McKee, did not agree to an interview but wrote in response to questions that “a healthy balance sheet ... enables SFD to make the necessary capital investmentsand improvements and toreduce outstanding debt.”
Propel’s leases with SFD came under fire a year ago, whenMr. DePasquale’s office, in an audit, accused the schoolnetwork of “essentially leasingthe buildings to itself,” creating“potential conflicts of interest.” The audit recommended that the Department of Education try to recover money already paid, and stop reimbursing for leases with “arelated party.”
The department has not sought to recover any of the money or change its reimbursements. “Until revisions are enacted, the Department has no choice but to continue to operate in accordance with current law,” which allows the reimbursements, wrote spokeswoman Casey Smith. She added that the department“intends to place additional resources behind monitoring and evaluating the integrity of programming and finances at both traditional andcyber charter schools.”
Mr. Resnick argued that Propel’s leases with nonprofit SFD reflect “an arrangement that has been vetted across Pennsylvania.”
Charter schools are publicly funded, but run independently from the state’s 501 districts. The state Department of Education lists 176 charters statewide, including 22 located in Allegheny County, three in Beaver, and one in Westmoreland. State law requires that they be organized asnonprofit corporations.
Run by eight separate nonprofits, supported by a fundraising Propel Schools Foundation and aided by SFD, the Propel schools are approaching 4,000 students, making them the dominant charter systemin Allegheny County.
When you add the eight Propel nonprofits, the foundation and SFD, the network last year reported paying 831 employees nearly $34 million in salaries, and reported $90.3 millionin assets and a surplus of$7.8 million.
Mr. Resnick is paid by one of the nonprofits, Propel Schools Inc., and his $162,336 salary and $50,592 bonus package last year trailed that of two other leaders of Allegheny County charter schools, and that of Pittsburgh Public Schools superintendent Anthony Hamlet, who earns $210,000 plus benefits.
When a student opts for a charter, that school receives payments, at the expense of the traditional district, based on a state formula. Propel collected nearly $52 million in tuition that would have otherwise gone to traditional schooldistricts.
Mr. Resnick noted that the formula does not factor in school facility costs, which are only addressed through the lease reimbursements. He said that in some other states, charters receive flat per-student facilities reimbursements, regardless of the ownershipof the school buildings.
Would such an arrangementhelp Propel? Mr. Resnick said it “would make a huge difference for Propel if this issue wasn’t being slung around by the auditor general because of what might appear to bea problem, or might actually be a problem, somewhere else .”
In Philadelphia, newspapers have probed complex, expensive bond deals and leases that charters there have used to secure buildings. State Rep. James Roebuck Jr., of Philadelphia, said he’s concerned that lease arrangements can “produce a surplus for which there’s very little accountability.”
In April, he introduced a bill aimed at ending reimbursements to any charter that leases from a landlord withwhich it has ties. A separate bill introduced in May in the Senate by Jim Brewster, D-McKeesport, Jay Costa, DForest Hills, and Wayne Fontana, D-Brookline, also aims to ban reimbursements for lease payments to building owners with business or family connections to the charterschool.
“You’re finding increasing amounts of public dollars being diverted,” Mr. Roebuck said, “from educating young people and into other things, like creating profits.”
No more airplanes
Exhibit one in the case alleging profits from charters may be Nick Trombetta, founder of PA Cyber, currently awaiting sentencing in federal court. He pleaded guilty a year ago (Aug. 24, 2016) to tax conspiracy related to the siphoning of $8 million from the school, through a nonprofit, to a network of other entities he created.
PA Cyber, which teaches some 10,800 students who learn via their home computers, has consistently collected over $100 million a year in tuition that would otherwise go to traditional schools. (It reached $122 million last year.) Before Mr. Trombetta left the school in 2012, PA Cyber paid more than40 percent of its receipts to the National Network of Digital Schools. That nonprofit and the online school were then led largely by the same clique from around Midland,Beaver County.
At the time, NNDS paid around 13 percent of its receipts to for-profit Avanti Management Group. That company covered purchases that benefitted Mr. Trombetta, including a plane, a luxury vacation home in Florida, and an Ohio residencefor a girlfriend, FBI investigators concluded.
During the investigation of Mr. Trombetta, Avanti folded. NNDS changed its name to Lincoln Learning. PACyber and Lincoln Learning have moved to a strictly business, client-vendor relationship, said the school’s newCEO Brian Hayden.
In its most recent IRS disclosures, PA Cyber reported spending roughly 26 percent of its funds with Lincoln Learning. Mr. Hayden predicted that wouldfurther decline.
In contrast to NNDS, which once handled nearly everything except the actual teaching, Mr. Hayden said Lincoln Learning will have more limited roles —- providing curriculum, strategic communications, cleaning buildings, removing snow and carpentry. “We have continued to pull some of the services they provided in house,”he said.
Mr. DePasquale said recent audits of PA Cyber have been comparatively benign. “Whatever issues we found, it wasn’t somebody using taxpayer money to buy a jet airplane,”he said.
The auditor said he is still worried about the creation of separate nonprofits that take on important functions for charter schools —and oftenresist scrutiny.
“The idea that some of these nonprofits are running management of actual schools, and we don’t get access into it … is a big problem for me,” he said. “At the end of the day, it is taxpayer money.”